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About Natera

It takes a few minutes on the 20 to transfer to the 1, then the 1 dips and dodges out of my university’s campus area, heads northbound on Lamar for a very long time, eventually notching a right hand turn on Parmer Lane, then hitting a left on McCallen Pass, dropping me off nearly right in front of Natera’s corporate building here in Austin, Texas.

That’s how I would get myself up to Natera, that is, if I cared even a little bit.

I take the bus often enough, and I think I already get my fair dosage of uncomfortable sitting positions and long rides with uninteresting views (thank you very much), but one day, just one day, I might go visit the good folks at San Carlos, California-headquartered Natera at their Austin corporate office, and they will probably tell me to get lost in the nicest possible way.

But probably not.

This was really just a rather convoluted and straight up odd way to introduce the company in a not-so-boring fashion, even though things did get a little weird there for a second.

At any rate, Natera is a relatively new company on the block (founded in 2004) that is in the diagnostics and laboratory testing business(es), and with that, primarily generates revenues through the collection of fees for its services, and while there is a major duopoly within this nook of the healthcare sector (Quest Diagnostics and Labcorp), both companies offering practically any and every type of general medical lab testing, Natera has found and continuously focused on its testing niches, which lie within the categories of oncology (cancer), organ health and women’s health, largely rooted in DNA tests that can potentially help patients better prepare for and protect themselves from current and/or future health ailments that they are more susceptible to due to their genes and family medical backgrounds.

I personally enjoy the fact that this company has seemingly kept a relatively small amount of eggs in its basket and is seemingly watching that basket rather closely as opposed to the broad and vast divide and conquer approach companies such as Quest and Labcorp have taken, as specialization, especially in rapidly growing and emerging markets such as DNA and oncology testing, which will (sadly) undoubtedly continue to see traction and organic demand given the fact that illnesses, diseases and concerns thereof have skyrocketed, most likely due to heightened awareness following what has so far been the worst of COVID-19.

At the end of the day, Natera maintains some very powerful technologies and can help many people of many backgrounds potentially unveil their health ailments, susceptibilities or predispositions to certain conditions before it is simply too late to adequately and properly treat them.

All of this being the case, we do feel comfortable in presuming that this company’s revenues are relatively resistant to recessionary pressures simply given the nature of the diagnostics industry, as with heightened awareness typically follows heightened worry and with heightened worry usually follows action, and people (and their families for that matter) are more than likely to prioritize getting medical testing done before engaging in much (if any) discretionary spending, and they are likely also comfortable paying a pretty penny when necessary, especially when it comes to highly important matters such as their genetic predisposition(s) to cancer, organ health as well as women’s health more broadly as it relates to themselves and their future children.

This is an interesting biotechnology company, no doubt about it, but in order for us to even consider an investment in the company through its shares (NASDAQ: NTRA), there are some key financials that we need to be, well, interesting as well, that is, in the best ways possible.

Natera’s stock financials

First of all, Natera flaunts a share price of $69.70 and a relative market capitalization of $8.4 billion (which is calculated by taking the number of shares outstanding and multiplying it by the company’s share price, by the way), and, unsurprisingly so, doesn’t currently offer its common stock shareholders an annual dividend nor does it present a price-to-earnings (P/E) ratio, both figures (or lack thereof, really) largely confirming to us that this company is not yet (net) profitable, as while it is probably profitable on a unit-by-unit sold basis, a major caveat within the biotechnology and greater overall pharmaceutical industries is that the investment and reinvestment basically never stops, which is evidently the primary reason we had little to no hope that Natera was net profitable at this juncture, or, specifically on the basis of its price-to-earnings ratio, doesn’t have any earnings to display, which is further confirmed through its currently negative earnings per share (EPS) metric of -4.51.

Again, we already expected this to be the case, so we don’t feel as though we maintain any immediate reasons to count this company down and out quite yet, and there are plenty of unprofitable biotechnology companies that have been and are currently in the process of being acquired for billions by the bigger operators out there, for example, with Johnson & Johnson’s $2 billion-dollar buyout of (net) unprofitable biotechnology firm, Ambrx Biopharma.

I digress, but let’s just say I would be completely unphased if a few years down the road a major pharmaceutical conglomerate decided to take Natera off the market, or perhaps more sensibly, if one of the members of the diagnostics duo decided to drop a bunch of cash and tack on some debt to beef up their intellectual property (IP) and overall technological capabilities within its portfolio through a full fledged buyout of the company in question.

Nevertheless, in continuing to observe this company for exactly what it is on its own, Natera’s executives are at the helm of a balance sheet filled with just about $1.4 billion in terms of total assets as well as $689 million in terms of total liabilities, which by itself appears to be a very manageable balance sheet, especially given our preconceived growth presumptions about this company, as we will check monetarily but we do assume that this company’s revenues have been growing at a strong rate in recent years, of course, trickling some incremental debt financing to continue growing, and if this not-so-lofty assumption is accurate, Natera still has a lot of room to grow, and comfortably at that with a balance sheet such as this one.

Moving right along to the condition of the company’s income statement, Natera’s annual revenues since 2018 have definitely been growing at an impressive rate (score!), starting out at a relative base of $258 million, rising the following year to $302 million, $391 million in 2020, subsequently bolstering itself up to $625 million (as reported in 2021), leading all the way up towards its latest reported figure of $820 million in 2022, which not only confirms our growth presumptions but it also verifies that demand for this company’s testing services has indeed gone up, particularly following the initial onset of COVID-19, which, for better or worse, has evidently been a sort of catalyst for this company, and likely other diagnostic testing companies as well.

While this is all good and well, with great growth, especially at a relatively early stage, usually involves some bleeding on the cash flow front (as again, this company is not net profitable), and this company is far from being an exception to this general rule, as according to the company’s cash flow statement, Natera’s net income during the same 2018-2022 era has been exponentially diving deeper and deeper into the red, starting out at -$128 million in 2018 and finding its way down further to its latest reported net income figure of -$548 million, as reported by year end of 2022.

Again, this was to be expected, but we certainly aren’t in the mood to just blindly offer companies passes, especially as with the company’s pronounced and lengthening net income losses can also be found correspondingly worsening total cash from operations losses as well, ranging during the same time period between a relative high of -$63 million (2019) and a low of -$432 million (2022).

Frankly, while there is some cash flow bleed being incurred at a rather high rate for Natera, we take a good deal of comfort in knowing that the company’s revenues are still higher than its total cash from operations losses, as it can technically afford to bear such losses for the time being, but we still need to see the bleeding dry up a bit, say, within the rest of the decade most certainly, which we don’t think is all that commanding, as we aren’t asking the company to become net profitable (on a trailing twelve month, or TTM basis) but rather just show some signs of relief on the cash flow bleed front, as we completely sympathize with this company and its operations and products being cash intensive and we prefer for this company to innovate and lose some money now than play it exceedingly safe and not beat out competition early and sacrifice future growth.

Natera’s stock fundamentals

Speaking of the company’s profitability, there is some good news and some bad news in that the company’s listed TTM net profit margin is -50.50%, unequivocally confirming that this company is not yet net profitable and this also tracks quite well with the company’s continuous recent cash bleed, however, if there is any sort of silver lining to be found, it is the fact that the industry’s respective average TTM net profit margin is as low as -751.42%, thus Natera’s is substantially better on a comparable basis as it measures up with the competition’s cumulative average.

This generally makes sense as Natera is, within the new-age-specific lab testing category, a leader, and much of the company’s direct competition is smaller companies that might not even have their products and/or services approved by the Food and Drug Administration (FDA), and aren’t even close to eeking out any sort of profit, whereas Natera is apparently much closer.

With respect to the company’s TTM returns on both assets and investment(s), once again, there’s not a whole lot to write home about, however, being that it is a respectively larger company when measured up against its more agile peers, it makes some sense that given all of the additional expenses, operations and technologies the firm is developing and continue to sell, that its returns are rather lacking, with, for instance, the company’s TTM return on assets listed at -40.67% to the industry’s listed average of -6.58%, according to the figures displayed on TD Ameritrade’s platform.

Should you buy Natera stock?

Given the context of this company, what it does, the industry it operates within and considering a few other factors, nothing has really surprised us about Natera and its prevailing financial picture.

Its presence is expanding, its revenues are growing at a superb rate, its cash flows are burning and wavering towards the red at a correspondingly swell (yet expected) rate, its balance sheet is in great shape, it doesn’t pay out a steady annual dividend to its shareholders at the moment, and both its TTM net profit margin and aforementioned core return metrics are in the red, but, in sum, this was largely to be expected, and we are grateful for the lack of surprises.

We see Natera’s total addressable market (TAM) as a growing landscape and ecosystem and given the sheer amount of investment and what it is doing to integrate the cloud into its business in order to stay well ahead of the competition, we feel it is best to offer Natera’s stock (NASDAQ: NTRA) a “hold” rating, as the company’s share price is up about 41% over the last year’s span of time alone, and we think it wouldn’t be the worst idea to wait for the (likely) inevitable dip in share price that will come as a result of a deepening recession or perhaps some bumps along the road to success.

DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.

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