Why is Pacific Biosciences Stock Dropping?
When you start to stick your neck out and draw conclusions based on evidence you present, nobody says anything if you’re right. Crickets. However, if your conclusion turns out to be wrong, people will crawl out of their graves to tell the world what a moron you are. That’s just how it goes around here, and that’s a great sign. It means someone cares.
The worse thing is if you say something dumb and nobody calls you on it. Then, you just sit out there looking like a moron forever. At least when someone calls you on a mistake, you can say something reflective like “the journey isn’t always about the destination,” and people will like you even more because of the Pratfall effect. Fortunately, we have a strong reader base that keeps us in check, and often points out things we’re missing out on – like the rise of Pacific Biosciences of California Inc.
The Rise of Pacific Biosciences Stock
Just today, we came across this blurb in one of the many tech newsletters that grace our inboxes.
Any time someone calls a stock “red-hot,” that’s cause for concern. In this case, that’s probably an understatement, because this red-hot stock looks like it just might burn some hands. Incredibly, Pacific Biosciences (PACB) stock is up +875% in just six months on what appears to be some favorable press releases and lots of speculation about future potential. Here are some numbers to put that return into perspective.
- Nasdaq 6-month return +27%
- Nasdaq 5-year return +222%
- Nasdaq 20-year return +320%
- Illumina 10-year return +548%
- Pacific Biosciences 6-month return +875%
Our mandate is to find disruptive technology stocks and vet them for their “pure-play-ness” and red flags. Every pundit out there tells you what stocks to buy, but few will tell you what stocks to avoid. Tech is risky enough, so we look for red flags and avoid them, things like no traction, or customer concentration risk, or management’s broken promises. In the case of Pacific Biosciences, we would never have invested in the stock based on their historical revenue growth which has been flat for the past five years. Here’s a look at their last 10 years of revenues along with 2020 results (summed from their Q4-2020 results released just today).
In other words, investors in Pacific Biosciences are betting on the promise of future growth.
The Pacific Biosciences Growth Story
In the world of genomics, there is more than one way to read a genome. What Pacific Biosciences does is something called “long read sequencing” which is pretty much what it says on the tin. It’s being able to read all of the information in someone’s genome and do so accurately. The ability to achieve such accuracy will pander to any number of new and existing use cases, something that looks like a $20 billion total addressable market (TAM) according to the company’s latest investor deck.
Today’s story starts in 2018 when Illumina announced their intent to acquire Pacific Biosciences for $1.2 billion. In January 2020, the deal was officially called off, which probably was the right move for Pacific Biosciences. After that monster run up, they’re now worth just over $8 billion. So, what news was announced in the past two years that merited this massive market cap appreciation? Well, the company has a new CEO and they’ve announced collaborations with Asuragen and Invitae. The latter is “expected to deliver the most clinically relevant whole genome at substantially less than $1,000, opening adoption in routine medical care.” In the words of today’s hottest fund manager, “Pacific Biosciences is close to an inflection in clinical demand.”
The ARK Effect
Readers have been asking us lots of questions about “the ARK effect.” That is, when ARK Invest buys shares in a company or says favorable things about them, shares soar as a result. The Midas Touch of successful fund managers is a complex topic, and the answers aren’t so obvious. There have been murmurs about how ARK has become so big that they’re no longer able to move around without breaking some things. Organovo (ONVO) is a good example of a company that barely has a plan, yet shares are soaring because ARK holds it. Nano Dimension is another company that’s been enjoying the ARK effect. So, it’s worth noting that ARK is quite bullish on Pacific Biosciences with it presently being the second-largest position in the ARK Genomic Revolution ETF (ARKG):
In a November 2020 research note, ARK includes a section titled “Pacific Biosciences Is Close to an Inflection in Clinical Demand” which talks about how “long-reads can detect difficult-to-sequence mutations” something that comes in handy for oncology, rare diseases, hereditary disease predisposition, and neurology. Companies like Invitae are migrating from short-read to long-read sequencing which is just the beginning of the third age of genetic sequencing. If in fact long-read sequencing is the way forward, it would make sense to vet other providers of long-read sequencing technology.
Bionano Genomics and Long-Read Sequencing
We came across long-read sequencing before in an article titled Bionano Genomics Stock on Offer in IPO. In that piece, we noted how Bionano Genomics (BNGO) believes their technology is better than competing long-read technologies from Oxford Nanopore or Pacific Biosciences.
They’ve also enjoyed the ARK effect – kind of, sort of. In December of 2020, shares of Bionano were trading at around 50 cents per share. Less than 60 days later, they’re trading at $11.38 cents a share – a return of +2,176%. Their last quarterly earnings were nothing to write home about, correcting from The Rona like everyone else. What did happen was this:
What you see above is an ARK Invest analyst telling the Twitter-verse that he’d like to meet with the CEO of Pacific Bioscience. Then, this happened:
In looking at the constituents of the ARK Invest Genomics ETF, we don’t see Bionano Genomics in the list, yet shares are up +2,176% in less than 60 days. You can be sure of one thing. Hedge fund algos cleaned house on the way up, and they’ll clean house on the way down.
What About Illumina?
We’re long-time shareholders in Illumina and like to think they have a backup plan for when the Pacific Biosciences acquisition fell through. Navigating to their long-read page and reading the following isn’t very promising:
The TruSeq Synthetic Long-Read DNA Library Prep Kit has been discontinued. Illumina does not have an alternative solution. We remain committed to providing you with high-quality support and service.Credit: Illumina
Then, they go on to talk about their “long-read Application Ecosystem,” and the whole thing sounds kind of weak.
We’re certainly concerned about what ARK Invest has suggested – that long-read sequencing will become the norm – and want to be aware of any VHS vs. Beta story unfolding before our eyes. We’d like to think that Illumina has a plan here, but one thing we do know for sure. We’re not going anywhere near shares of either Bionano Genomics or Pacific Biosciences. Just today, one of the world’s most notorious tech investors – Mr. Masayoshi Son – did exactly the opposite.
SoftBank’s Investment in Pacific Biosciences Stock
The guy who takes the bus to work shouldn’t be giving financial advice to the guy who drove a Bentley to the meeting. In a similar fashion, we shouldn’t be criticizing what large institutional investors do because we’re not managing billions of dollars. We’ll simply point to SoftBank’s self-described “foolish” $18.5 billion investment in WeWork, or their options dabbling, and conclude that they have a very large risk appetite. Today, Softbank decided to invest a whopping $900 million in Pacific Biosciences with a structure that’s described as follows.
Under the terms of the investment, SB Management will purchase a total aggregate principal amount of $900 million in Convertible Senior Notes due 2028 (the “Notes”). The Notes will have an initial conversion price of $43.50 per share of the Company’s common stock, subject to customary anti-dilution and other adjustments. The Notes will mature on February 15, 2028, unless earlier repurchased, redeemed or converted. The Notes bear 1.5% interest per year.Credit: Pacific Biosciences
When institutional money steps in after a 6-month stock price appreciation of +875%, it has to mean something. What SoftBank did today was the same thing they did with their investment in WeWork – they rewarded promises instead of traction.
From Traction to Promises
Enough people are beating the dead horse about how today’s market is like that of the late 1990s, and we don’t disagree with that. But if we had to dig a little deeper, we might say that a key similarity is that investors are extremely eager to reward the promise of future growth, more so even than the actual growth in the present. The large number of pre-revenue SPACs is a great example, with the inside joke being that if you’re a company with actual revenue growth, then a SPAC probably isn’t for you. That’s literally what the SPAC comparables slide we talked smack about yesterday is – a big fat pile of everyone’s promises.
But Pacific Biosciences Isn’t Falling
Astute readers will question why the title of this article says “dropping” instead of rising, since Pacific Biosciences stock is soaring to the moon on the heels of the SoftBank announcement. That’s because our SEO experts are skating to where the puck will be.
If the stock is indeed at the lowest point it will ever be again, now is the time to buy some shares. If, however, you believe as we do that we’ll see some mean reversion, then shares of Pacific Biosciences will start dropping at some point in the future. At this point in time, people will panic and turn to The Oracle. Here’s an example of the types of questions they’ll ask her:
We do a lot of keyword research when we write our articles which helps them bubble to the top. We’ve noticed that today’s investor never asks “why is stock X rising?” and only starts asking questions when the stock starts falling. (Pundits need to talk more about why a stock is rising, not just write it off as being “red hot.”) We’ve titled this article appropriately because when this stock starts falling, this article will start popping up, and people will realize that it probably wasn’t wise to buy a stock solely based on future promises.
A Full Disclosure
There will likely be a small hoard of Robinhood trader types who will glance at the article title and immediately start screaming “short seller!!!” on Twitter. It’s kind of like how when you disagree with someone today and they call you a troll rather than engage in debate. To those people we say what we always say – shorting is a fool’s game – or in the words of those wacky weekday warrior Redditors:
We don’t short stocks. Ever.
It’s understandable that 2020 will be a bad year for everyone, and maybe even 2021. But at some point in time, we’ll hopefully get past the you know what, and companies will be firing on all twelve cylinders again. It’s at that point in time that Pacific Biosciences should be able to finally break that psychological glass ceiling of $100 million in yearly revenues and start their journey towards breaking the $800 million mark, nearly what Illumina did in last quarter alone. If you’re sad because you missed out on the meteoric rise of Pacific Biosciences stock, just remember people, the journey isn’t always about the destination.