PacBio (PACB)

Genomics company Pacific Biosciences of California (NASDAQ:PACB) announced better-than-expected revenue in Q1 CY2025, but sales fell by 4.3% year on year to $37.15 million. Its non-GAAP loss of $0.15 per share was 20.5% above analysts’ consensus estimates.

Company Overview

Pioneering what scientists call "HiFi long-read sequencing," recognized as Nature Methods' method of the year for 2022, Pacific Biosciences (NASDAQ:PACB) develops advanced DNA sequencing systems that enable scientists and researchers to analyze genomes with unprecedented accuracy and completeness.

Genomics and sequencing companies within the life sciences industry provide the technology for increasingly personalized medicine, drug discovery, and disease research. These firms leverage cutting-edge platforms for high-throughput sequencing and genomic analysis, enabling researchers and healthcare providers to better understand genetic underpinnings of diseases. While the industry enjoys high barriers to entry due to proprietary technology and intellectual property, the business model also faces significant R&D costs, reliance on continued innovation, and exposure to shifts in academic, biotech, and clinical research funding. Over the next few years, the subsector is well-positioned to benefit from tailwinds such as increasing adoption of precision medicine, expanded applications for sequencing technologies in areas like oncology and rare disease diagnostics, and growing use of genomic data in drug development. Advances in artificial intelligence could further enhance the speed and accuracy of genomic insights. However, potential headwinds include price sensitivity among research institutions and healthcare systems that are constantly trying to contain and lower costs. Additionally, regulations around data privacy and genomic testing are not yet set in stone, adding uncertainty to the industry.

Pacific Biosciences competes with other DNA sequencing technology providers, primarily Illumina (NASDAQ:ILMN), which dominates the short-read sequencing market, Oxford Nanopore Technologies (LSE:ONT), which offers portable long-read sequencing solutions, and Element Biosciences, a private company focused on affordable, high-quality sequencing.

Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.

With just $152.4 million in revenue over the past 12 months, PacBio is a tiny company in an industry where scale matters. This makes it difficult to succeed because healthcare is heavily regulated, complex, and resource-intensive.

A company’s long-term performance is an indicator of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Thankfully, PacBio’s 11.1% annualized revenue growth over the last five years was decent. Its growth was slightly above the average healthcare company and shows its offerings resonate with customers.

Long-term growth is the most important, but within healthcare, a half-decade historical view may miss new innovations or demand cycles. PacBio’s recent performance shows its demand has slowed as its annualized revenue growth of 6.6% over the last two years was below its five-year trend.

This quarter, PacBio’s revenue fell by 4.3% year on year to $37.15 million but beat Wall Street’s estimates by 5.2%.

Looking ahead, sell-side analysts expect revenue to grow 10.2% over the next 12 months, an improvement versus the last two years. This projection is noteworthy and suggests its newer products and services will spur better top-line performance.

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

PacBio’s high expenses have contributed to an average operating margin of negative 256% over the last five years. Unprofitable healthcare companies require extra attention because they could get caught swimming naked when the tide goes out. It’s hard to trust that the business can endure a full cycle.

Analyzing the trend in its profitability, PacBio’s operating margin decreased significantly over the last five years. The company’s two-year trajectory also shows it failed to get its profitability back to the peak as its margin fell by 300 percentage points. This performance was poor no matter how you look at it - it shows its expenses were rising and it couldn’t pass those costs onto its customers.

This quarter, PacBio generated a negative 1,155% operating margin. The company's consistent lack of profits raise a flag.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

PacBio’s earnings losses deepened over the last five years as its EPS dropped 1.8% annually. We tend to steer our readers away from companies with falling EPS, where diminishing earnings could imply changing secular trends and preferences. If the tide turns unexpectedly, PacBio’s low margin of safety could leave its stock price susceptible to large downswings.

In Q1, PacBio reported EPS at negative $0.15, up from negative $0.26 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects PacBio to improve its earnings losses. Analysts forecast its full-year EPS of negative $0.70 will advance to negative $0.69.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

PacBio’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 138%, meaning it lit $138.05 of cash on fire for every $100 in revenue.

Taking a step back, we can see that PacBio’s margin dropped by 25.5 percentage points during that time. Almost any movement in the wrong direction is undesirable because it is already burning cash. If the trend continues, it could signal it’s in the middle of a big investment cycle.

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

PacBio burned through $173.8 million of cash over the last year, and its $732.7 million of debt exceeds the $343.1 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the PacBio’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of PacBio until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

We were impressed by how significantly PacBio blew past analysts’ revenue expectations this quarter. We were also glad its EPS outperformed Wall Street’s estimates. Zooming out, we think this was a good print with some key areas of upside. Investors were likely hoping for more, and shares traded down 2.5% to $1.16 immediately following the results.

Updated: May 22, 2025 at 11:54 PM EDT

Are you wondering whether to buy PacBio or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

We see the value of companies helping consumers, but in the case of PacBio, we’re out. Although its revenue growth was good over the last five years, it’s expected to deteriorate over the next 12 months and its declining adjusted operating margin shows the business has become less efficient. On top of that, the company’s cash profitability fell over the last five years.

PacBio’s forward price-to-sales ratio is 1.8x. The market typically values companies like PacBio based on their anticipated profits for the next 12 months, but it expects the business to lose money. We also think the upside isn’t great compared to the potential downside here - there are more exciting stocks to buy.

Wall Street analysts have a consensus one-year price target of $2.03 on the company (compared to the current share price of $0.94).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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