Studying the Invitae Saga
Jon Gall @jongall45 wrote a great memo about Chamath's recent interview on the Knowledge Project.

I love that Jon highlighted a point about building a community of people that want to understand specific companies better. In that example the company was Tesla, and the community was everyday people who were motivated to research, learn, and share because they felt like Tesla was doing something meaningful in the world.

Being exposed to that community and engaging yourself affords the opportunity to financially participate if you personally are convinced the company will do well.

Right now I'm doing something similar with Invitae. I think there's a possibility that $NVTA has a shot at materially improving the way we diagnose and treat diseases such as cancer (and many other diseases).

The purpose of forming a community like this is not to pump a stock and then move on to the next one, but to study, discuss, and validate your thesis on a company. As my knowledge grows, I invest more or less depending on what I learn over time.

Where I'm at in the Invitae journey now: I'm listening to every Invitae earnings call starting from the beginning and progressing to the present; kind of like how you would go back and read a series of novels in a saga. I'm immersing myself in the 'world of Invitae' similar to how you would delve into the world of Lord of the Rings or Harry Potter 😅.

This is helping me pick out the plot points in Invitae's life thus far. And thus, I have a question for the CommonStock community today about one thing I noticed:

In Invitae's Q4 2016 Earnings Call, CEO Sean George laid out this goal for 2018:

"No longer a concept story, we now focus on swift execution as we pursue both our long-term growth strategy and positive cash flow in the fourth quarter of 2018."

Invitae did not hit this goal of becoming cash flow positive by the end of 2018. In fact, their cash flow has only become more and more negative:

Post media

Why am I focusing on this? Because I think it brings up some interesting questions for the group:

  • How important is management's character to you when you are investing in a company?
  • When management states a goal and then doesn't hit it, does that matter?

And I would start off by saying it depends on whether the goal was a key driver of the investment narrative. If not, then investors will mostly shrug it off.

For example, in Invitae's case, the investment thesis is that the cost of sequencing a human genome will continue to fall so fast, that genomics testing will become a mainstream part of medical care in the next decade. By setting themselves up as a leader in the space now, Invitae will profit in the future.

Invitae's stock is much higher than it was in 2016 because having positive cash flow by 2018 wasn't the thing that would decide whether Invitae would be successful on their long-term mission or not.

Would being cash flow positive be nice? Of course. But thats not why anyone invested in the company (although, it might be why some institutional investors did, but perhaps that's why Sean George felt like he had to make that a goal in the first place even though it wasn't that important. And its also why we retail investors can make calculated bets that can increase our chances of beating institutions)

This memo is getting too long, but I'd love to ask this question of the community: You can't be cash flow negative forever. How long are you willing to invest in a company that is cash flow negative?
Drew Shepard's avatar
What sort of revenue figures do you expect to see in the next 5-10 years? $NVTA has been on my watchlist, so thanks for the insights.
ronny sutanto's avatar
Jon Gall's avatar
First of all thanks for the shoutout 👊🏼 This name has been on my watchlist for awhile yet I never really knew what they did. Your posts have been a huge help. Thanks!
Nathan Worden's avatar
Great question @drew - this will be a fun exercise. So to start with, Invitae's revenue growth went from 116% to 46% from 2018 to 2019. Analysts are expecting another big slowdown in revenue growth this year because of the Coronavirus; so they're looking at 19.4% revenue growth to finish out 2020. Then the thought is things will really re-accelerate in 2021 and come in at 92% revenue growth. Here's what that looks like visually:
Nathan Worden's avatar
Gosh so as far as the next 5-10 years- the thing about projections like that is if your initial estimates for the first couple of years are slightly off, the differences compound year after year and then you end up with hugely different numbers. So really, the value in doing revenue projections like that aren't so much to actually predict what will happen, but to give yourself a lot more background knowledge and context of the direction things are headed in when numbers do get announced.

For example, if I just decide arbitrarily that Invitae has a shot at compounding revenue growth at 50% for the next five years, the math looks something like this:
2020: 258 million X .5 = 129 + 258 = 387 million
2021: 387 million X .5 = 193 + 387 = 580 million
2022: 580 million X .5 = 290 + 580 = 870 million
2023: 870 million X .5 = 435 + 870 = 1,305 million
2024: 1,305 million X .5 = 652 + 1,305 = 1,957 million
2025: 1,957 million X .5 = 978 + 1,957 = 2,935 million

So we end up with 2.9 billion of revenue in 2025. But assumptions like these are almost never right. Analysts on wall street who get paid a lot to spend all day trying to tweak the input assumptions to be as accurate as possible never consistently get it right- especially for early stage companies that have more unknowns.

The most you can do is look at the numbers year to year and try and decide whether those numbers align with the trajectory the company should be on if it is adhering to your thesis or not.