Here's Why Genetic Testing Stocks Lost as Much as 26.1% in May

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The genetic testing industry has been the source of epic growth in recent years, but investors were forced to wade through significant volatility last month following the release of first-quarter earnings results. Shares of Invitae (NYSE: NVTA) led the cliff-diving with a loss of 26.1% in May, followed by a 21.3% decline for Myriad Genetics (NASDAQ: MYGN) and an 18.8% tumble for Genomic Health (NASDAQ: GHDX), according to data from S&P Global Market Intelligence. Invitae is the only member of the trio that posted a positive year-to-date gain.

Wall Street clearly didn't like the business updates from around the industry. However, a closer examination suggests the pessimism is misplaced. Invitae seized an opportunity to rapidly expand revenue at the expense of short-term operating income, while Genomic Health is delivering on metrics that matter most for a well-positioned genetic testing leader. Myriad Genetics, which continues to struggle to grow newer products in an appreciable manner, may have been the only business that deserved a steep haircut.

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A researcher in the lab with a disappointed look on his face.

Image source: Getty Images.

So what?

Invitae surprised Wall Street analysts by changing its near-term strategy. Instead of continuing to decrease cash burn and gradually shrink operating losses, CEO Sean George said the business will plow capital into growth opportunities to "put even more distance between Invitae" and its competitors by the end of 2020. That could cause full-year 2019 cash burn to increase 50% year-over-year, although management is confident the investments will deliver more than $220 million in revenue this year and $500 million in revenue in 2020.

That's one heck of a leap in revenue -- and it will depend heavily on the success of the upcoming commercial launch of the company's direct-to-consumer sales channel. Invitae plans to offer clinical-grade genetic tests to individuals without insurance companies or doctors acting as middlemen. Customers will have access to expert interpretation of the results from genetic counselors and a follow-up from a clinician. If the platform succeeds, then it could fundamentally change healthcare and the company's growth trajectory.

While Wall Street analysts sold the idea of wading through more red ink at Invitae, they seem to be misunderstanding the most important drivers for Genomic Health. The business grew Q1 revenue 17% year-over-year and delivered operating income of $11.5 million, almost half of last year's total. Shares fell 11% on the quarterly update.