It was a frustrating year for 10x Genomics shareholders – and that might be putting it mildly.

The business grew revenue only 5% from the year-ago period. For comparison, it delivered year-over-year growth of 64%, 22%, 68%, and 106% in the four previous years. The pain inflicted by the sudden growth slowdown was further compounded by the unwinding of the stock market bubble. Shares fell 76% in 2022.

Despite a precipitous decline in the stock price, shares of 10x Genomics were hardly the most attractive opportunity in the living tech landscape at the start of 2023. The surge in the first seven weeks of the year makes this a great example of the nuanced "great business, bad price" investment.

Here's some more nuance for investors: It's likely 10x Genomics is providing weak revenue guidance for 2023. Even if that's the case, shares of 10x Genomics are relatively expensive – whether based on our 2023 or 2024 model.

Worse, investors could be sleepwalking into an even sharper decline in shares if the company's most important source of revenue – consumables revenue – is starting to stall.

By The Numbers

10x Genomics is one of the best lab hardware businesses ever created. Such businesses shouldn't be considered investment opportunities until they generate at least two-thirds of total revenue from consumables. Right now, only three growth companies clear that high bar – Illumina, Oxford Nanopore, and 10x Genomics.

The business kept on keeping on in 2022. 10x Genomics grabbed 84% of total revenue from consumables, which is the highest of any lab hardware company I'm aware of. (This is down a tick from 85% in 2021 and 2020, but the decline isn't meaningful).

Of course, the dependence on consumables cuts both ways. 10x Genomics reported consumables revenue growth of only 4% in 2022, compared to year-over-year growth of 66%, 22%, 92%, and 133% in the previous four periods. Consumables revenue growth dictates total revenue growth, which explains the disappointing performance last year.

Data Source: SEC filings.

The timing of the growth slowdown hurt the business further down the income statement. 10x Genomics grew operating expenses at a faster clip than revenue primarily due to preparations for the Visium launch in late 2022 and severance packages paid out as a result of workforce reductions.

Nonetheless, the business exited the year with $430 million in cash, which provides a multi-year runway to support product launches across all three instrument platforms.

Here's the one question investors should be asking that Wall Street isn't: Is 10x Genomics encountering stronger, and perhaps more permanent, headwinds for its consumables revenue?

As I wrote in October 2022:

It'll be important to watch consumables revenue and competition. My understanding is consumables from other companies can be used on instruments from 10x Genomics, which is not a common capability in lab hardware. That could impact the most important source of revenue for the business should customers seek out lower cost "off-brand" consumables. This doesn't appear to be having much of an impact yet and may never, but it would be potentially destructive to growth.

Well, this may now be having an impact.

10x Genomics expects full-year 2023 revenue of $580 million to $600 million, representing growth of 12% to 16% from the prior year. That's still below the historical trend and was well below pre-earnings modeling from Solt DB Invest. It also reflects the launch of the new Visium platform, which essentially made no contributions in 2022.

On the one hand, new lab hardware platforms can take a few years to ramp up, so 10x Genomics may be able to achieve double-digit annual revenue growth in 2024 and 2025, too.

On the other hand, if revenue growth in the next few years is mostly driven by Visium, then investors need to entertain the possibility there are broader headwinds stifling the portfolio. That could expose investors to significant downside risk.

Forecast & Modeling Insights

It's possible 10x Genomics is lowballing revenue guidance for 2023. The launch of the new Visium instrument for in situ single-cell analysis should provide a relatively easy opportunity to re-accelerate revenue growth. But management is likely wary of repeating the same mistakes from last year, when it originally expected annual revenue growth of 25%, only to cut that down to 4%.

Nonetheless, the early-year rally in the stock market suggests to me that Wall Street hasn't properly recalibrated to the new macroeconomic realities. Individual investors also may be suffering from a resurgence in FOMO and anchoring their expectations to 2021 valuations.

• The Federal Reserve is likely to keep interest rates relatively high in 2023 and 2024. Even if rates are cut in 2024, we're unlikely to experience the near-zero environment that drove valuations from 2009 through 2021.
• If investors consider that the performance of the stock market (and the valuations of growth stocks) from 2009 through 2021 was an outlier and not the norm, then it's unlikely many growth stocks will earn valuations above 10x sales for the rest of the decade.

As of market close on February 17, 2023, shares of 10x Genomics sported a valuation of $5.91 billion. That's equivalent to 10x expected revenue for 2023. That could be close to twice an acceptable price depending on the trajectory of interest rates through the rest of the year.

Importantly, shares won't magically leap higher if interests are cut in 2024, so investors are cautioned against anchoring expectations to prices and valuations from 2021. These were highly unusual and will take years to reclaim. In fact, they may represent an all-time high that will never be matched.

Here's how our modeling has changed after full-year 2022 results were announced:

• Full-year 2023 revenue of $609.4 million, representing year-over-year growth of 18%.
• This assumes 10x Genomics increases revenue guidance over the course of 2023. Based on my own observations and site visits, many labs haven't significantly reduced their budgets despite macroeconomic headwinds and higher interest rates. Visium has significant potential in its first year on the market.
• Full-year 2024 revenue of $700.8 million, representing year-over-year growth of 15%.
• This assumes revenue growth flatlines even as new products launch across the company's three core platforms, including Visium. Note that this assumes the business adds roughly $91 million in revenue during 2024, compared to adding $93 million in 2023, so it's still a respectable level of growth for a lab hardware business of this size.
• This could be an overestimate if consumables revenue encounters (or is already encountering) stronger headwinds.

Margin of Safety & Allocation

(Updated to reflect our 2023 model.)

10x Genomics is considered a Growth (Quality) position. The current margin of safety range for the company based on our 2023 model is below:

• Current Price (market close February 16): $51.43 per share
• Likely Undervalued:          <$25.39 per share
• Midpoint:                            $30.47 per share
• Likely Overvalued:            >$35.55 per share
• Allocation Range:             Up to 5%

Our margin of safety dashboard will reflect the 2023 model. For investors who want to look ahead, here's how the margin of safety would change if based on our 2024 model:

• Current Price (market close February 16): $51.43 per share
• Likely Undervalued:          <$29.20 per share
• Midpoint:                            $35.04 per share
• Likely Overvalued:            >$40.88 per share
• Allocation Range:              Up to 5%

10x Genomics reported 115.357 million shares outstanding as of January 31, 2023. This figure includes both Class A and Class B shares. The margin of safety ranges above assume 120 million shares outstanding, which accounts for an additional 4% dilution.

Further Reading

• February 2023 press release announcing fourth-quarter and full-year 2022 operating results
• February 2023 SEC filing (10-K) detailing fourth-quarter and full-year 2022 operating results
• October 2022 research note initiating coverage of 10x Genomics, describing single-cell analysis, and questioning the trajectory of operations

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