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When a technology is billed as existentially transformative, the primary impulse of investors is often fear – fear of missing out (FOMO). That why the big investing news story so far in 2023 has been artificial intelligence (AI).
However, for investors, the obvious play to profit from generative AI is already a crowded trade. It’s a popular adage to 'invest in shovel-makers when there’s a gold rush', but shares in Nvidia (NVDA) – it makes the graphics processing units (GPUs) facilitating generative AI – have already tripled in value this year.
When it comes to AI, it is clear the genie is out of the bottle. AI is a technological opportunity, as well as a risk for a whole raft of industries, just as the internet was in the mid-1990s.
That brings me to a question that is at odds with the gold rush and shovel analogy. That is whether companies well placed to actually utilize AI in their businesses could end up being the best investments – especially if they don’t have same lofty valuations as big tech firms like Nvidia do.
For the answer to that, let me delve into one company for you.
AI in Healthcare: Guardant Galaxy
Many AI techniques are already being used in healthcare, especially in the medical devices, services and life sciences segments of the industry. And in other sectors, such as testing and diagnostics (where the highest degree of accuracy is required), the current non-AI solutions can be greatly improved upon by AI.
I like companies with existing expertise to build on, which could capitalize on the AI opportunity.
One such area is oncology testing and the cancer research programs of Guardant Health (GH). These programs will be greatly buoyed by its partnership with South Korea’s Lunit and the launch of an AI-based suite of products called Guardant Galaxy.
Guardant Health said that the first application in its Guardant Galaxy suite is the AI-backed digital pathology platform created by Lunit.
According to the company, the AI-powered scoring algorithm for the Guardant360 TissueNext PD-L1 test, enhanced detection of cancer biomarkers (molecules, genes, etc.) by over 20% in comparison to manual pathologist interpretation in the most challenging cases of non-small cell lung cancer (NSCLC).
According to the results of a recent study, published in the European Journal of Cancer, the algorithm can help pathologists by reducing interpretation discrepancy and enabling better prediction of the outcomes of treatments.
In addition, early Guardant Galaxy applications will also have new native AI analysis applications, which include the prediction of the response of patients to immunotherapy.
The genomic and epigenomic data generated by Guardant Health’s tests are planned to be mined for additional applications. These include improved oncology drug and biomarker discovery and development capabilities, according to Guardant.
Guardant Health Stands Out
Guardant stands out because its AI offering will become central to growing what is already its largest revenue line. For the 2022 financial year, GAAP-reported revenue was $450 million, of which $392 million was attributable to precision oncology testing.
There is a strong, long-term growth story behind this company, whose stock has a market capitalization of $4.6 billion. That story is centered around aging global populations causing demand to rise for ultra-accurate cancer diagnosis and treatments.
Even before AI, Guardant Health's full-year reported revenues have enjoyed a compound annual growth rate (CAGR) of 49% over the past four years, with the trajectory of that increase being quite smooth, too.
Its latest quarterly results, announced on August 3, were no exception.
Revenue in the second quarter was $137.2 million, a 26% increase from $109.1 million from the year-ago period. Precision oncology revenue grew 36%, driven predominantly by an increase in clinical testing volume, which grew 49%.
Guardant management also raised guidance. The company now expects full year 2023 revenue to be in the range of $545 million to $550 million, representing growth of 21% to 22% compared to full year 2022. This compares to its previous guidance range of $535 million to $545 million.
Keep in mind though that Guardant Health is still an early-stage that will not turn a profit for several years. Nevertheless, it is a speculative buy anywhere in the $30s – a bargain level from its 52-week high of $62.75 a share.
