Natera Stock Gives Every Indication Of Being Significantly Overvalued

GuruFocus.com
·4 min read

- By GF Value

The stock of Natera (NAS:NTRA, 30-year Financials) is estimated to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $102.92 per share and the market cap of $8.9 billion, Natera stock is estimated to be significantly overvalued. GF Value for Natera is shown in the chart below.


Natera Stock Gives Every Indication Of Being Significantly Overvalued
Natera Stock Gives Every Indication Of Being Significantly Overvalued

Because Natera is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 7.3% over the past three years and is estimated to grow 21.13% annually over the next three to five years.

Link: These companies may deliever higher future returns at reduced risk.

Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Natera has a cash-to-debt ratio of 2.62, which ranks in the middle range of the companies in the industry of Medical Diagnostics & Research. Based on this, GuruFocus ranks Natera's financial strength as 5 out of 10, suggesting fair balance sheet. This is the debt and cash of Natera over the past years:

Natera Stock Gives Every Indication Of Being Significantly Overvalued
Natera Stock Gives Every Indication Of Being Significantly Overvalued

It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Natera has been profitable 0 over the past 10 years. Over the past twelve months, the company had a revenue of $391 million and loss of $2.83 a share. Its operating margin is -55.31%, which ranks worse than 71% of the companies in the industry of Medical Diagnostics & Research. Overall, GuruFocus ranks the profitability of Natera at 1 out of 10, which indicates poor profitability. This is the revenue and net income of Natera over the past years:

Natera Stock Gives Every Indication Of Being Significantly Overvalued
Natera Stock Gives Every Indication Of Being Significantly Overvalued

Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Natera is 7.3%, which ranks in the middle range of the companies in the industry of Medical Diagnostics & Research. The 3-year average EBITDA growth rate is -2.7%, which ranks worse than 73% of the companies in the industry of Medical Diagnostics & Research.

Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Natera's return on invested capital is -106.00, and its cost of capital is 9.14. The historical ROIC vs WACC comparison of Natera is shown below:

Natera Stock Gives Every Indication Of Being Significantly Overvalued
Natera Stock Gives Every Indication Of Being Significantly Overvalued

Overall, the stock of Natera (NAS:NTRA, 30-year Financials) is estimated to be significantly overvalued. The company's financial condition is fair and its profitability is poor. Its growth ranks worse than 73% of the companies in the industry of Medical Diagnostics & Research. To learn more about Natera stock, you can check out its 30-year Financials here.

To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.

This article first appeared on GuruFocus.

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