Is 23andMe’s stock a longer-term play after Citi downgrade?

23andMe’s [ME] stock got thumped earlier this month after Citi downgraded the stock from Buy to Neutral. Behind the downgrade, analysts claimed that 23andMe’s stock valuation was ‘too rich’, with not much upside.

“We are downgrading ME from Buy/High Risk to Neutral/High Risk and increasing our target price from $12 to $13. After a 70%+ run over the past month, we think current valuation leaves little room for upside,” the analysts at Citi wrote.

But 23andMe’s stock could benefit in the long-term from the company’s wealth of generic data that could be used to develop new drugs - certainly GlaxoSmithKline [GSK] is interested. So while the upside might be slight in the near-term, are there longer-term gains to be had?

What’s happening with 23andMe stock?

23andMe’s stock is down nearly 19% this month, closing Tuesday at $8.85 and well off the intraday high of $13.65 intraday high it hit 8 November.

One thing that will have put off investors is a slow-down in sales. Rich Smith, writing in The Motley Fool, points out that 23andMe’s growth rate is slowing. In the second quarter, sales were up 7%, well off the 23% growth rate seen in the quarter before that.

Total revenue for the quarter ending September 30, 2021, was $55 million, driven by Personal Genome Service (“PGS”) kit sales and subscriptions. Net losses came in at $17 million, down from the $36 million in the same period last year, although an Adjusted EBITDA loss of $30m was up from the previous year’s $20.

For full year 2022, 23andMe expects revenue of between $250m and $260m, and an Adjusted EBITDA loss of $143m to $158m. Yet a cash balance of $701m at the end of the last quarter on no debt suggests that the company is in a decent financial position.

Smith notes that the company makes most of its revenue from its consumer and research division. However, its therapeutics division - which pulled in just $100,000 in revenue last quarter - could be worth more than the consumer division over the long-term. This is the area that could drive long-term growth in 23andMe’s stock.

What’s the long-term growth driver for 23andMe’s stock?

23andMe’s USP is its customer base of almost 9 million people, most of whom have agreed to allow their data to be used for genetic research.

Customers use 23andMe’s testing kits to tell them something interesting about their genetic makeup, for example to shed light on their genetic ancestry. This information is then used to build a database that can identify links between diseases and genes. Potentially this information could be used to help create drugs tailored to different genetic profiles.

A partnership with GSK shows how this could be a catalyst for longer-term stock price growth.  23andMe and GSK will use this data to comb for clues as to the role genetics play in different diseases and translate those insights into potential new drugs. The two companies expect to have started their first joint human clinical trial in July for a drug that targets human tumours.

Announced in July the partnership includes a $300m equity investment from GSK and an exclusive discovery period of four years. 

“This is a new way of thinking about drug development...the concept is coming to bear.” - GSK chief scientific officer of research and development on the 23andMe partnership

“This is a new way of thinking about drug development,” said Hal Barron, GSK’s chief scientific officer and president of research and development, in a July interview. “And the concept is coming to bear.”

For investors, this could inject some growth back into 23andMe’s stock over the mid to long-term.

As it stands, analyst price targets are thin on the ground when it comes to 23andMe. Along with Citi’s $12 to $13 price target a lone analyst polled by Refiniv has a $14 target on the stock, suggesting a 58% upside on Tuesday’s close.