(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Shares of Exact Sciences Corp. (EXAS) have fallen nearly 36% from their highs of $63.60 back in November. With shares now trading around $38.75, options traders are betting the stock falls by another 25% by the beginning of next year. This outlook comes in stark contrast to a bullish outlook held by analysts, who are forecasting robust revenue growth for the company.
The average analyst's price target on Exact Sciences is currently $56.91, nearly 47% higher than the current stock price. According to data from Ycharts, nine of the 14 analysts that cover the stock rate it a buy, while five rate it a hold.
Bearish Options Traders
Options traders do not hold the same level of enthusiasm as the analyst community. The options set to expire on Jan. 18, 2019, are indicating traders are betting shares of Exact Sciences will continue to fall. The $35 strike price options have nearly 13,500 open put contracts versus only 692 call contracts. For the $35 puts to be profitable, the stock would need decline to roughly $29.50, a drop of 24.50%.
The bearish put activity carries further down the option chain with roughly 5,500 open put contracts at the $30 strike and another 10,700 open put contracts at the $25 strike price. By contrast, the most significant number of open call contracts is only 1,300 at the $45 strike price.
Analysts see revenue for Exact Sciences exploding higher in coming years, climbing by roughly 63% to $431.7 million in 2018, followed by growth of approximately 42% in 2019. But the earnings outlook is nothing to be desired, with the company expected to lose $1.00 per share in 2018, and a loss of another $0.23 per share in 2019. What is the more significant concern, though, is that analysts have been raising their revenue outlook for the company but cutting their earnings outlook for the company.
Additionally, shares of Exact Sciences aren't cheap either when looking at the stock on a price-to-sale multiple. Shares currently trade at 7.6 times 2019 revenue estimates of $614.45 million. That sales multiple comes at a higher rate than the average of 6.7 and the median of 5.5 of the top 25 companies in the Nasdaq Biotechnology ETF (IBB).
The market is divided when it comes to the future direction of Exact Sciences' stock, with analysts backing the bulls, and the options traders playing the bears. Where shares go will be determined by how far the company can drive revenue and earnings growth in coming quarters.
Michael Kramer is the founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.