When I was in elementary school, I was always fascinated by classmates who would rattle off the components of their ancestry. Invariably, I always came across the 1/16th Cherokee tribe; I’ve always wondered, how do you know? Well, VG Acquisition Corp (NYSE:VGAC) can potentially answer that question via its merger with consumer genetics analysis firm 23andMe. Is this enough of a catalyst to buy VGAC stock?
On paper, the case appears compelling. Analysts in the field found that in 2019, the genetic testing market generated $12.7 billion in revenue. Further, by 2027, this sector could reach approximately $21.3 billion. That would represent a compound annual growth rate of slightly more than 10% between 2020 and 2027.
Of course, the novel coronavirus pandemic has likely put a damper on the 2020 numbers and the following years’ forecast. Although I don’t want to speak for anyone, it seems to me that most folks have more pressing concerns. Nevertheless, on a (hopefully) return to normal, this special purpose acquisition company can start tapping into this demand. Therefore, many investors are clearly excited about VGAC stock.
Still, you want to be careful about SPACs. While they’ve been the toast of Wall Street over the trailing year, they don’t always have the best performance record. As I mentioned in another report, The Wall Street Journal found that SPACs on average underperform the broader market by roughly 3% annually in the first three years following their debut.
But specific to VGAC stock, InvestorPlace contributor Mark Hake provides compelling evidence that shares are overheated relative to their fundamentals. Essentially, the price tag is too high for an unprofitable company. As well, management’s revenue projections could be too much on the optimistic end.
Should this raise concern for prospective buyers?
Longer-Term Question Marks on VGAC Stock
The funny thing about fundamental analysis is that it’s only useful when it’s useful. What I mean by that is investing exclusively via the fundamentals is a bit like driving by looking in the rearview mirror. Credit goes to technical analyst Alessio Rastani for that phrase.
When assessing the prospect for VGAC stock, you can’t just look at what it did in the past and make assumptions about management’s assumptions about future growth projections. Ultimately, the market is the final arbiter of the price at any given point. And this price reflects what the masses believe — right or wrong — what value the target stock will eventually be assessed.
Therefore, in my opinion — and my opinion only — the better predictor of VGAC stock is to make assumptions about the underlying company’s consumer base. Here, I’d like to break away from politically correct talk and give it to you straight: 23andMe and most American-based consumer genetics analysis firms are probably useful to a large extent for people with European ancestry.
According to Tufts University, “Studies that have compared ancestry databases have found poorer concordance with Hispanic, East Asian, and South Asian descent.” Why is that? Ancestry tests are only as good as the databases. As you know from statistics, larger databases produce more accurate interpretive results than smaller databases, which can be impacted greatly by anomalous data points.
So, you just need to do the science and the math. Realistically, I’d say the market potential for 23andMe is two-thirds to three-fourths of whites in America (numbering 250.5 million in 2019) and some portion of the Black population.
I say “some” because according to the Tufts article mentioned above, members of the author’s family who are Black expressed concerns about their genetic information being “sold to the highest bidder, to be used for research — or worse.”
Given the Henrietta Lacks controversy, I’d say that this is a genuine concern.
What’s the End Game?
Of course, the racial/ethnic component of possible projections for VGAC stock may be an uncomfortable topic. However, it’s also a necessary topic because people use genetic tests not just to discover their ancestry but to also assess risks for certain diseases and medical conditions related to genetics.
As LiveScience.com posited, you can have real problems when a test analyzes genetic markers in a vacuum. In such cases when you don’t bring in additional context, you can have situations — which LiveScience described — where demographics for those markers are ignored, leading to either false positives or false negatives.
If you’re trying to assess cancer risk, for instance, you want to know that you’re getting the best, most comprehensive information. Until the U.S. population gets equal distribution of diversity and equal participation in genetic research, these research firms are skewed scientifically and mathematically toward the majority population.
To put it another way, VGAC stock is probably overvalued. Shares are likely pricing in roughly equal demand and applicability across all U.S. demographics. I hope to have shown that this is simply not the case.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.