What a time it’s been for Exact Sciences. In the past six months alone, the company’s stock price has increased by a massive 152%, reaching $103.18 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is there a buying opportunity in Exact Sciences, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Is Exact Sciences Not Exciting?

Despite the momentum, we're swiping left on Exact Sciences for now. Here are two reasons we avoid EXAS and a stock we'd rather own.

1. Cash Burn Ignites Concerns

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.

While Exact Sciences posted positive free cash flow this quarter, the broader story hasn’t been so clean. Exact Sciences’s demanding reinvestments have consumed many resources over the last five years, contributing to an average free cash flow margin of negative 2%. This means it lit $2.00 of cash on fire for every $100 in revenue.

2. Previous Growth Initiatives Have Lost Money

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Exact Sciences’s five-year average ROIC was negative 13.7%, meaning management lost money while trying to expand the business. Its returns were among the worst in the healthcare sector.

Final Judgment

Exact Sciences isn’t a terrible business, but it doesn’t pass our bar. After the recent surge, the stock trades at 121.8× forward P/E (or $103.18 per share). This multiple tells us a lot of good news is priced in - we think there are better opportunities elsewhere. We’d suggest looking at one of our top digital advertising picks.

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