Quadruple-barreled Inflection Points are rare breeds.
Think SMCI at $400. POWL at $100. ROOT at $13.
So, what IS a quadruple-barrelled Inflection Point? Let's break it down.
Top Tier Inflection Points manifest when there are multiple Inflection Points within one over-riding Inflection Point. The most powerful Top Tier Inflection Points contain 4-5 such components…
We believe GeneDx Holding Corp. (WGS) earnings report tonight is one such powerful, quadruple-barrelled Inflection Point. We will get to what they do in a minute. But, first, the numbers:
GeneDx is the product of a merger of two companies in 2022, SemaDx and GeneDx. A good part of Sema's biz is being phased out, with GeneDx proving to be the disruptor, with its Exome and Whole Genome Sequencing testing becoming the standard of care within Pediatrics:
Couple of Facts:
Fact #1: Q1 is typically a much slower quarter than Q4, sequentially. Standard of care within Med-Tech occurs when you see unusual patterns of sequential-growth manifest like we saw here. Instead of Q1 volumes being down, THEY WENT UP. Again, an incredible proof-point that accelerated adoption is afoot. Take a look:
This slide showing the surge in Gross Margins YoY is BANANAS:
Fact #2: More than 50% of GeneDx's Exome and Genome tests are being rejected. Zero margin. Yes, you read that right. As the net percentage of rejections continues trending lower, ASP's which have gone up ~10% - from $2,400 to $2,600 the past three quarters - will continue trending higher. This additive ASP is incredibly profitable, flowing directly to the bottom line.
GeneDx is literally shouting out to the market at what is forthcoming next year with this slide - an incredible Profitability and Cash Flow Inflection - much sooner than the Sell-Side will be modeling out. Absorb the info on this this slide carefully. It is super informative:
Why should we expect adoption to tilt further toward Exome testing? Well, the numbers do not lie. These tests are much more accurate than the previous standards of care:
We recently raised the prices for our offerings dramatically. We did this because we have quickly proved our mettle in presenting THE BEST INFLECTION POINTS to our clients in a timely manner. We are the guys working the Graveyard Shift during earnings season.
To this end, you had to be present on the Conference Call during dinner last night to get to the MOST POWERFUL DATA POINT from Q1 Earnings: the Cash Burn came down DRAMATICALLY.
While the Cash Burn was reported as $17.2M for Q1, in reality, it was much lower, as there were a number of One-Time Items, including:
That's $9.7M less, or only $7.5M in cash burn in Q1. This is HUGE, as it means we can now triangulate when the company will turn Cash Flow Positive - potentially, as early as Q4 of this year.
How can we speak so confidently? Well, the math is pretty simple.
Looking ahead, we see big upside to current consensus for both 2024, 2025 and 2026, particularly on the bottom line.
GeneDx’s Investor Deck is very helpful, particularly the back half, which explains how reimbursement levers continue to move in their direction.
With GeneDx owning 80% markets share within Pediatrics, these tailwinds will help drive further accelerated adoption, not to mention a series of Beat n Raises the rest of this year. This will automatically increase consensus for the next few years holistically in the coming quarters, thereby catalyzing big Institutional Buying.
Here is where consensus stands as of 8:53 Monday Night, before the first shift upward in numbers on Tuesday morning:
Instead, we see a big dispersion between forward consensus and likely numbers, the HOLY GRAIL for Top Tier Inflection Points manifesting themselves into Multi-Baggers over quarters and years.
FY24 Revenues of $265-$270M and a profitable and Cash-Flow Positive Q4, its biggest quarter of the year. Testing businesses build steam each quarter. With Q1 always the weakest, Q4 should be a barn burner for GeneDx.
This means we should see $330M in FY25 Revenues and a HUGE INFLECTION in Profitability. Same for FY26, where we could see $400M+ in Revenues and $2 in EPS.
As for the stock, it has done nothing but go down dramatically since merging and coming public a few years ago. Oh, they also did a 1-for-33 split (similar to ROOT!), so the share count is tight at 26M shares.
Assuming our thesis plays out, should the stock get above $17-$18 in the coming weeks, there is clear sailing to the mid-$20s:
We bought stock in the AH as high as the mid-$14s. We plan to buy more stock tomorrow.
WGS's inflection point is a super powerful one.
While we could be wrong, when we get a Quadruple-Barrelled Inflection Point, we barrel in too. This approach has played a big part in getting the accounts we oversee up triple-digit percentages thus far this year, as well as playing a big role in us CAGR'ing a ~40 return the past 7 years (soon to be audited).
As such, we plan to make WGS a Top 3 Allocation in the accounts we oversee by Tuesday’s close.
In 12mo, we see strong potential for a move to $25-$30 to unfold. The type of growth forthcoming here deserves a premium multiple of 2x 2026 sales by the middle of next year. 2x $400M in 2026 Sales gets us to the low-$30s. So the math works.
And, remember, super-tight float here. Mt. Sinai is not selling anytime soon, as I am sure they know what they have in GeneDx, a true disruptor at a pivotal Quadruple-Barrelled Inflection Point. Not sure any of these other Top Holders do much more than trim their position. This action will leave HARDLY any stock for Big Guys to buy into in the coming quarters as WGS posts a few additional Big Beats.
Top 5 Holders have ~15M shares locked up. With only 26M out there, that is 11M freely traded stock out there:
STOP LOSS: Given our conviction level, we plan to utilize a rarely-employed Time Stop of Q2 earnings.
Top Tier Inflection Points deserve special parameters as they are the main drivers of Alpha for us. Considering the special nature of this Quadruple-Barrelled Inflection at hand here and with our Conviction Level 10, we feel very comfortable letting WGS play out as outlined.
Of course, should the stock quickly head to the high-teens and low $20s, we will take off some risk as we always do and then shift to our mindset to a much longer-term oriented trade.
GeneDx announced a $75M ATM last night. We view this as noise. The company has no need to draw on the ATM meaningfully in the near term. If anything the ATM helps improve liquidity in the stock for some new Big Guys. I generally hate ATMs but the overhang is not too bad for teenager stocks – not good for stocks under $5…
Clearly, Competitive Risk is a factor as well. There are other Big Players in the space such as Illumina. However, GeneDx already has the faith of the Medical Community. From the 10-K:
94% of Pediatric Specialists in the US who order Exome testing have ordered from GeneDx.
Our years of Exome and Genome Sequencing experience have provided us with a substantial dataset, including over 2.7M structured phenotypes with nearly 60% of all Exomes to date processed as Parent-Child trios. We have invested resources over time to annotate the phenotypes and sequence the parents of patients, because their genetic sequences can often provide additional diagnostic information, potentially improving the precision of genetic analysis.
Finally, WGS is a thinly-traded stock, with a tight-share count.
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Disclosure: We are long WGS stock. We may change our positioning at a moment’s notice, without notifying you of any such moves.
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