What a fantastic six months it’s been for Guardant Health. Shares of the company have skyrocketed 46.9%, hitting $86.90. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy Guardant Health, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Guardant Health Not Exciting?
Despite the momentum, we're sitting this one out for now. Here are three reasons there are better opportunities than GH and a stock we'd rather own.
1. Fewer Distribution Channels Limit its Ceiling
Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.
With just $982 million in revenue over the past 12 months, Guardant Health is a small company in an industry where scale matters. This makes it difficult to build trust with customers because healthcare is heavily regulated, complex, and resource-intensive.
2. Cash Burn Ignites Concerns
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Guardant Health’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 49%, meaning it lit $49.05 of cash on fire for every $100 in revenue.
3. Restricted Access to Capital Increases Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
Guardant Health posted negative $220.9 million of EBITDA over the last 12 months, and its $1.84 billion of debt exceeds the $1.20 billion of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
We implore our readers to tread carefully because credit agencies could downgrade Guardant Health if its unprofitable ways continue, making incremental borrowing more expensive and restricting growth prospects. The company could also be backed into a corner if the market turns unexpectedly. We hope Guardant Health can improve its profitability and remain cautious until then.
Final Judgment
Guardant Health isn’t a terrible business, but it doesn’t pass our quality test. After the recent surge, the stock trades at $86.90 per share (or a forward price-to-sales ratio of 9×). The market typically values companies like Guardant Health based on their anticipated profits for the next 12 months, but it expects the business to lose money. We also think the upside isn’t great compared to the potential downside here - there are more exciting stocks to buy. We’d suggest looking at one of our top software and edge computing picks.
Stocks We Would Buy Instead of Guardant Health
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