Post-Report Sell-Off Seen as UnwarrantedSupporting Arguments
The market's reaction to the Q1 report was excessively negative
The stock possesses fundamental upside potential driven by a high revenue growth rate
The technical analysis indicates a probable rebound
Investment Thesis
GeneDx (WGS) specializes in delivering precise medical diagnostic results, leveraging exome and genomic testing to accurately diagnose genetic disorders. The company exclusively generates its revenue within the United States.
The recent GeneDx report significantly exceeded market expectations, yet the market's reaction was starkly negative. In our assessment, this presents a promising acquisition opportunity for WGS. Revenue for the first quarter of 2025 surpassed consensus estimates by 9.6%, also resulting in a substantial positive EPS surprise. The company has revised its full-year 2025 revenue guidance upwards by a median of $12.5 million, now projecting between $360 million and $375 million. This adjustment accounts for an anticipated $3 million to $5 million in revenue from the prospective acquisition of Fabric Genomics. The net increase in the guidance aligns closely with the value realized from the first-quarter surprise.
The only potentially contentious aspect of the report is the recorded 0.5% q/q decline in testing volumes within the largest revenue-generating segment, exome and genome sequencing. This trend has not been observed in this segment before. However, a seasonal dip in Q1 testing volumes is typical within the laboratory industry. This decline is primarily driven by a reduced number of working days in the first quarter and heightened diagnostic demand in Q4, as patients seek to maximize their insurance benefits before year-end. Historically, the low base effect coupled with GeneDx's robust sequential growth has counterbalanced unfavorable seasonal trends in Q1. Additionally, in the latest quarter, management cited the California wildfires as a possible negative influence on testing volumes. Consequently, we believe this testing dynamic does not warrant the marked downtrend seen in the price of WGS, especially given the upgraded guidance and the expansion of the product portfolio, both of which are poised to drive revenue growth over the next three years.
WGS stock is fundamentally undervalued. The GeneDx peer group has maintained a trading average of a 6.8 EV/Sales multiple over the past three years. We regard this figure as an appropriate target for GeneDx. Presently, the 2026 EV/Sales multiple stands at 5.6. We believe that sustained robust revenue growth over the next three years provides ample opportunity for valuation appreciation from the existing levels. Utilizing comparative valuation metrics, we project a target price for WGS shares at $87 over the next two months, accompanied by a "Buy" recommendation.
To mitigate risks, we advise establishing a stop-loss at $58. From a technical standpoint, a robust short-term support zone is identified within the range extending from $60 to the 200-day moving average.
