10x Genomics has had an impressive run over the past six months. While the S&P 500 has been flat, the stock has returned 39.8% and now trades at $18.24. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in 10x Genomics, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think 10x Genomics Will Underperform?
We’re happy investors have made money, but we're cautious about 10x Genomics. Here are three reasons we avoid TXG and a stock we'd rather own.
1. Lackluster Revenue Growth
Long-term growth is the most important, but within healthcare, a stretched historical view may miss new innovations or demand cycles. 10x Genomics’s recent performance shows its demand has slowed significantly as its annualized revenue growth of 1.9% over the last two years was well below its five-year trend. 
2. 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 $642.8 million in revenue over the past 12 months, 10x Genomics 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.
3. Previous Growth Initiatives Have Lost Money
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
10x Genomics’s five-year average ROIC was negative 44.5%, meaning management lost money while trying to expand the business. Its returns were among the worst in the healthcare sector.
Final Judgment
10x Genomics doesn’t pass our quality test. With its shares outperforming the market lately, the stock trades at $18.24 per share (or a forward price-to-sales ratio of 3.6×). The market typically values companies like 10x Genomics 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 an all-weather company that owns household favorite Taco Bell.
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