10x Genomics Stock Plummets: Why We’re Not Worried

“Every cell in your body has the same DNA. Except it doesn’t.” That was the title of a 2018 New York Times article that talked about how “the genome doesn’t just vary from person to person, it also varies from cell to cell.” That same year, an article was published by Science discussing a landmark study which shows how brain cells can revamp their DNA over time, something that could potentially cause Alzheimer’s. In other words, there’s a clear need for scientists to achieve cellular resolution for DNA sequencing which can only happen with tools like those on offer from 10x Genomics (TXG) and other life sciences companies.

Traditional next-generation sequencing (NGS) methods examine DNA taken from a collection of cells so that it becomes “the average of the population.” Such methods are referred to as “bulk sequencing” as opposed to “single cell sequencing” which is what it says on the tin. That’s according to an article by Technology Networks which breaks down the single-cell sequencing process into four steps.

1. Isolation of single cells from a cell population.
2. Extraction, processing, and amplification of the genetic material of each isolated cell.
3. Preparation of a “sequencing library” including the genetic material of an isolated cell.
4. Sequencing of the library using a next-generation sequencer.

That fourth step is where Illumina comes into the picture given they’re the dominant provider of NGS machines. Here’s a diagram taken from a 2021 blog post by Illumina showing how the 10x Genomics workflow interacts with Illumina sequencing machines.

As always, we want to invest in the single-cell revolution by finding the leading provider of tools, and that seems to be 10x Genomics.

10x Genomics – A Single Cell Leader

The last time we checked in with 10x Genomics was back in August 2019 when we wrote about The 10x Genomics IPO and Single-Cell Sequencing. Since that piece, we exited our position in Berkeley Lights – another company dabbling in cells – and went long 10x Genomics. Today, we want to check in with the company and make sure they’re healthy and continue leading the pack. With shares having fallen -68% since the beginning of the year (compared to a Nasdaq fall of -23% over the same time frame), checking in also helps provide us with confidence in the face of heavy paper losses.

Whenever possible, we like to find subject matter experts to do the heavy lifting on the research side. According to the bright folks at DeciBio, 10x Genomics is emerging as a leader in helping scientists understand cells. 10x Genomics customers include all of the top 100 global research institutions as ranked by Nature in 2020 based on publications and all the top 20 global biopharmaceutical companies. No single customer accounts for more than 10% of revenues. Two key metrics to watch – provided in the 10-K – can be seen below.

The number of machines sold needs to increase for obvious reasons, while “consumable pull-through” represents total consumables revenue for the given time frame divided by the number of machines deployed. Essentially, it’s a metric that ensures customers are using the machines they’re purchasing.

With capital drying up, we also want to evaluate survivability for any company we’re holding. 10x Genomics gross margins are nearly 85% which means the platform and consumables are highly profitable. With $540 million in cash and marketable securities on the books exiting Q1-2022, the company has a runway of about three years given last quarter’s operating loss of $41 million.

Stumbling Revenue Growth

The ultimate ground truth for leadership in a total addressable market (TAM) is revenue growth. That’s where 10x Genomics appears to have stumbled in Q1-2022.

Here’s what the company said about the slowdown in their filings.

We believe revenues in the quarters ended December 31, 2021 and March 31, 2022 were negatively impacted by certain of our customers’ staffing capacity issues, slowdowns and general increased uncertainty around near-term operations. We believe these impacts were particularly relevant for academic customers who make up the large majority of our revenue.

While 10x Genomics compares every quarter to the same quarter in the previous year, we like to see how each quarter compares to the one immediately preceding it. Here’s how that revenue slowdown looks when we break it out by revenue segment.

	Q1-2021	Q2-2021	Q3-2021	Q4-2021	Q1-2022
Instruments	11,125	16,877	17,121	19,351	14,429
Consumables	93,079	97,146	106,117	122,398	97,950
Services	1,617	1,819	2,059	1,781	2,117

Above you can see how comparing Q1-2022 to Q1-2021 doesn’t look half bad, but comparing Q1-2022 to Q4-2021 shows a meaningful drop in revenues across both instruments and consumables. The company blames some of this drop on a cold chain failure that took place in Europe. Some customers received a product that was spoiled and only discovered this after running their experiments. Consequently, orders were put on hold as the company worked to figure out the problem and resolve it. Indeed, we see that Q1-2022 revenues for Europe dropped sharply by 40% compared to other regions which experienced growth – except North America.

	Q4-2021	Q1-2022	Percent Change
North America	77,188	59,687	-23%
Europe	34,730	20,532	-41%
China	19,347	20,760	+7%
Asia-Pacific ex-China	12,265	13,517	+10%

The 23% drop in North American revenues is concerning and may relate to what the company said about “uncertainty around near-term operations” for academic customers. If three quarters of 10x Genomics revenues come from academic customers, and academic institutions are deciding to cut back their budgets because the economy is hitting the skids, then that’s a problem that might persist throughout the remainder of the year. Sure, the company expects that commercial customers will be the majority revenue contributors in the future, but that’s going to take some time. And that’s only a benefit if commercial usage is more resilient to budget cuts than academic usage.

On the bright side, the breadth of applications that 10x Genomics touches means that traction will likely continue. Here’s a look at the distribution of 3,300 peer-reviewed articles that have been published based on data generated using their products. 

The 10x Genomics Chromium platform consists of multiple solutions that are being developed in response to customer demands.

The last item in the above table – Visium – is a pure consumables offering that’s used by Chromium customers. Revenues from Visium are blended into Chromium consumables to form a single consumables segment. Not seen above is a third platform called Xenium, a versatile instrument, consumables, panels, and software, that will allow researchers to create gene expression maps at cellular and subcellular resolution. Expected to launch at the end of this year, the new platform was mentioned 23 times in the Q1-2022 earnings call implying that analysts have high expectations for it.

Our 10x Genomics Position

We’ve been adding shares of TXG over the past rolling year and are closing in on the maximum amount of capital we allocate to any single position. For those investors sitting on the sidelines, you may want to see how Q2-2022 results are looking to see the final impact of the European cold supply chain problem and whether North American revenues continue to decline. Market volatility has increased which means fear is in the air. In times of uncertainty, budgets typically get cut as institutions of all types become more cost-conscious. 10x genomics seems to be leading the pack in what they do, but a falling tide affects all boats. With a simple valuation ratio of 13 based on last quarter’s results, there’s nothing keeping TXG shares from taking a big dump if Q2-2022 disappoints the lofty expectations of investors. If you’re opening a position or adding to one, do so slowly over time as opposed to trying to time the market. You’ll never buy at the bottom, and you’ll never sell at the top.

Even if academic budgets are cut across the board and 10x Genomics’ revenue growth flatlines for a while, they have the gross margins needed to survive if cash starts to run dry. Management talks about continuing expansion in 2022 with plans to hire upwards of 100 salespeople. We expect they have their finger on the pulse of the market and don’t see much cause for concern following their Q1-2022 revenue stall. While the European cold chain hangover may carry over into Q2-2022, they’ve set expectations for a resumption in growth for Q3/Q4 2022.

We continue to expect our full-year 2022 revenue to be in the range of $600 million to $630 million representing growth of 22% to 28% over full year 2021.

10x Genomics Q1-2022 Earnings Call

If that doesn’t happen, then we’ll start to worry.

Conclusion

If your tech portfolio seems to be crumbling before your eyes, that’s because volatility goes both ways. Newbie investors panic and sell at a loss. A battled hardened investor has the temperament to stick with their original thesis through times of turmoil. If you invest in quality companies, they’ll survive tough times and thrive when the dust settles. Strong gross margins, broad market penetration, and solid key metrics mean 10x Genomics will likely stay the course and continue to execute regardless of what their share price does.

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