Clinical Advances and AI Will Drive Expansion Into New Diagnostic Markets

Key Takeaways

• Growing adoption of molecular diagnostics and expanded clinical validation are driving revenue growth and increased reimbursement in core areas like oncology and organ health.
  
• Investments in AI, automation, and new product launches are improving operational efficiency and positioning the company for future expansion in personalized medicine.
  
• Heavy investment needs, regulatory hurdles, intense competition, and reimbursement challenges create persistent profitability and growth risks across Natera's core diagnostic markets.

Catalysts

A diagnostics company, provides molecular testing services worldwide.

• Increasing adoption and acceptance of advanced molecular diagnostics is driving sustained volume and revenue growth across Natera's diversified portfolio, with significant headroom remaining for further penetration-particularly in oncology (Signatera) and organ health (Prospera); this will likely boost top-line revenue.
  
• Expanding clinical validation through large-scale trials (DARE, IMvigor011, PROCEED/FIND, etc.) and broadening indications is expected to lead to further payer adoption and reimbursement, especially for new tumor types and expanded Medicare coverage; this should drive higher ASPs and gross margins.
  
• Accelerated integration of AI and automation into diagnostic processes and revenue cycle management is providing greater operating leverage and efficiency, resulting in lower COGS and improving operating margins and net earnings over time.
  
• Investment in new product launches (e.g., Fetal Focus NIPT, Signatera Genome, AI-based biomarkers) and a robust R&D pipeline positions Natera to capture growth from long-term trends in personalized medicine and early detection, underpinning future revenue expansion.
  
• Natera is managing operating expenses while scaling up (e.g., commercial hiring in oncology, AI technical staff), with near-term OpEx increases not yet impacting revenue but setting up a slingshot effect expected to drive meaningful revenue and margin improvements beginning in late 2025 and 2026.

Natera Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Natera's revenue will grow by 15.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from -12.9% today to 3.7% in 3 years time.
• Analysts expect earnings to reach $110.9 million (and earnings per share of $0.68) by about September 2028, up from $-253.2 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $442.3 million in earnings, and the most bearish expecting $-239 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 335.4x on those 2028 earnings, up from -90.8x today. This future PE is greater than the current PE for the US Biotechs industry at 15.5x.
• Analysts expect the number of shares outstanding to grow by 3.96% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.78%, as per the Simply Wall St company report.

Natera Future Earnings Per Share Growth

Risks

• Significant reliance on ongoing clinical trial success and future regulatory or reimbursement approvals for new indications (e.g., Medicare coverage of expanded cancer types, FDA approval for early cancer detection), introducing execution and regulatory risk-failure or delays could hinder revenue growth and margin expansion.
  
• High and growing R&D and SG&A expenses, including major investments in new trials, expanded commercial team, and AI initiatives, may create persistent pressure on net margins and delay pathway to sustainable profitability, especially if incremental revenues from these investments take longer to materialize or underperform expectations.
  
• Intensifying competition in core oncology and women's health markets, as well as threat of new entrants or disruptive technologies (such as whole genome sequencing or diagnostics from larger, better-capitalized players), may lead to average selling price (ASP) erosion and lost market share-putting downward pressure on revenue and gross margins over the long term.
  
• Revenue "true-up" adjustments and collection efficiency improvements have contributed meaningfully to recent results, but these cash cycle improvements and payer mix dynamics may be difficult to sustainably replicate, leading to increased volatility and uncertainty in cash flow and earnings projections.
  
• Broader industry risks-including increasing regulatory scrutiny (e.g., MolDX reimbursement policy changes), payer cost-containment pressures, and potential tightening of healthcare budgets due to economic headwinds-could restrict reimbursement rates or utilization of advanced diagnostics, negatively impacting long-term revenue growth and net earnings.

Valuation

• The analysts have a consensus price target of $198.45 for Natera based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $268.0, and the most bearish reporting a price target of just $37.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.0 billion, earnings will come to $110.9 million, and it would be trading on a PE ratio of 335.4x, assuming you use a discount rate of 6.8%.
• Given the current share price of $167.53, the analyst price target of $198.45 is 15.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.