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Is Exact Sciences Corporation Stock a Buy?

Owning a stock that doubles in value in less than 11 months is exciting. But what word do you use for a stock that rises to 4.5 times its original price in that amount of time? Thrilling? Exhilarating? Whatever word is the best fit, it applies to Exact Sciences (NASDAQ: EXAS).

Everything that could go right seems to be doing so for the company behind the popular Cologuard DNA screening test for colorectal cancer. But with its rapid rise leading to a very lofty valuation, is Exact Sciences stock still one for investors to buy?

Image source: Getty Images.

Wind in its sails

Let's first look at the positives going for Exact Sciences -- and there are plenty of them. Sales for Cologuard are skyrocketing. In the third quarter, the company reported revenue of $73 million, up a whopping 158% over the prior-year period. Exact Sciences boosted its full-year 2017 revenue guidance to between $254 million and $257 million, up from $230 million to $240 million.

It's not hard to figure out why sales are growing so much. Exact Sciences said 161,000 Cologuard tests had been completed in the third quarter, up 136% over the same period in 2016. Average recognized revenue per test increased 9% year over year to $451. The math is simple: A much higher volume of tests times higher revenue per test equals much higher revenue. 

There's no reason to think things are going to slow down anytime soon. Exact Sciences expects even more tests -- in the neighborhood of 173,000 to 177,000 -- to be completed in the fourth quarter. The company is continuing to grow the number of providers ordering Cologuard tests. Inclusion in the U.S. Preventive Services Task Force (USPTF) recommendations for colorectal cancer screening was a huge plus. Cologuard is now covered for 87% of the addressable market. 

Exact Sciences has also mounted an effective direct-to-consumer marketing campaign, including TV commercials highlighting the convenience of the Cologuard test. This effort appears to be paying off in making Americans who are reluctant to have a colonoscopy aware of a non-invasive alternative.

Potential problems

In my view, there are two primary problems, though, that Exact Sciences could face in the future. The more concerning issue is the possibility that a new product could render Cologuard obsolete.

Quite a few companies are working to develop liquid biopsies that can detect cancer at an early stage. Gene-sequencing pioneer Illumina (NASDAQ: ILMN) formed GRAIL specifically for this purpose. Other financial backers of the start-up company included some of the most prominent names in technology funding: ARCH Venture Partners, Bezos Expeditions, Bill Gates, Sutter Hill Ventures, and GV. Earlier this year, pharma giant Bristol-Myers Squibb (NYSE: BMY) also bought a stake in GRAIL

Exact Sciences has its own effort under way to develop liquid biopsy cancer tests also. The company has partnered with Mayo Clinic to detect various types of cancer at early stages using DNA markers. If this effort is successful, it would be a less expensive approach than the gene-sequencing approach GRAIL is taking. The big question, though, is whether Exact Sciences will be successful in its quest. If it's not, Cologuard could be in trouble. 

Another potential major problem for Exact Sciences is its sky-high valuation. The company isn't profitable yet, so commonly used valuation metrics based on earnings can't be used. However, Exact Sciences stock currently trades at nearly 43 times sales. That's much higher than the price-to-sales ratios of many other stocks that most investors consider to be priced at a premium.

Obviously, there's a lot of growth baked into Exact Sciences stock's price right now. Any bump in the road for the company in delivering that growth will probably cause the stock to drop significantly.

To buy or not to buy?

I have looked at the bearish case against Exact Sciences in the past and arrived at the conclusion that the company's positives clearly outweighed the negatives. That's still my view.

Exact Sciences stock will probably continue its upward momentum into 2018 and beyond. The combination of Cologuard's expanded payer access, greater provider acceptance, and increased patient awareness should drive sales for the DNA test steadily higher.

There certainly is risk associated with buying Exact Sciences. For now, though, I think the risk-reward profile of the stock appears to be favorable. I wouldn't necessarily count on another 350% jump in the next year, but Exact Sciences still looks to be a buy.

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Keith Speights has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Illumina. The Motley Fool has a disclosure policy.