Given a recent negative article in Consumer Reports on DNA testing for consumers — as well as mixed reviews on 23andMe — I recommend avoiding VG Acquisition (NYSE:VGAC) and VGAC stock at this point.
Why? Right now, VGAC’s valuation is quite high. Meanwhile, the barriers of entry in consumer DNA testing appear to be relatively low.
VG Acquisition, a special purpose acquisition company (SPAC), recently agreed to merge with 23andMe. As InvestorPlace contributor William White notes, 23andMe “offers genetic testing […] and uses that information to provide [customers] with details about their health and wellness.” Now, that service might sound like a hard industry to break into. But it turns out that’s not quite the case.
VGAC Stock and Consumer Reports
My first concern with VGAC stock has to do with Consumer Reports, a name that still has significant influence with American consumers. Recently, it warned that “experts say results [of consumer DNA testing] may be easy to misinterpret or could be based on a misapplication of the science.”
That same article also casts doubt on the ability of these DNA test to accurately determine where people’s ancestors lived — one of the big selling points of 23’s product. Further, Consumer Reports suggests that, when it comes to using DNA to evaluate health, consumers are generally better off relying on doctors instead.
But that’s not all. Lastly, Consumer Reports also recently warned that “few laws” restrict the use and dissemination of the DNA data obtained by 23andMe and its peers. Law enforcement agencies have utilized the data already to solve crimes and insurers could use it in the future to determine rates.
All of these points paint 23andMe in a bad light. So, through word-of-mouth and social media, the issues raised by Consumer Reports could very well become more widely known and hurt the company’s business. That could also cause VGAC stock to drop meaningfully.
Mixed Reviews and Potentially Tough Competition
The negatives for VGAC stock don’t stop there, though. For instance, the reviews of 23andMe on Consumer Affairs as well as on Amazon’s (NASADAQ:AMZN) site are mixed. On the former, the company’s “Overall Satisfaction Rating” was only three out of five stars as of Feb. 24.
One reviewer wrote on Feb. 12, “My daughter purchased this for me […] My joy turned into complete disappointment when I received my ‘results.’ The information was so vague and generalized that it could have applied to anyone.”
On Jan. 28, another reviewer stated that “[23andMe] failed to capture my DNA results after 2 attempts & then only refunded me the base cost.”
Some reviewers, however, have had good things to say about the company and its tests. For example, the situation on Amazon was much better — 84% of reviewers gave the product five stars and another 9% gave it four. Still, 6% of reviews came in below that.
Perhaps the more important issue facing 23andMe, however, is that many companies having entered the consumer DNA testing space. Now, it appears that VGAC does not have the market to itself.
Bottom Line
As of earlier this month, InvestorPlace contributor Mark Hake estimated that the “pro forma enterprise valuation” of VGAC stock was $5.56 billion. Hake also noted that the firm expects its 2024 revenue to reach $400 million.
As Hake points out, its pro forma price-sales ratio — based on its estimated 2024 revenue — is about 14. Moreover, the company does not even expect its EBITDA to be positive in 2024. And the value of VGAC has only dropped by about 20% since Hake’s article.
So, given all the fundamental issues that the company is facing, the valuation of VGAC stock is way too high right now. Bottom line? Investors should avoid the name.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.