Biotech Stock Soars 60% in 2024: Cathie Wood’s Bold Investment

Key Points

• Tempus AI is a healthcare firm with incredible amounts of data it can use to improve patient outcomes and sell to other parties.
• Cathie Wood has significant assets invested in the firm through the ARK Invest funds.
• Accounting used in its last earnings report makes it hard to tell how close it is to being profitable.

In just ten days, shares of the mid-cap healthcare stock Tempus AI NASDAQ: TEM have gone from down 4% to up nearly 60% in 2024. Famed investor Cathie Wood recently increased her allocation to the company through the ARK Invest family of funds.

ARK has a sizable allocation to the company, with a market value of around $90 million. She has an especially meaningful allocation through the ARK Genomic Revolution ETF BATS: ARKG, which accounts for just under 4% of the portfolio. Fund management usually considers a 2% allocation to one stock significant. Thus, her allocation represents a rather bullish sentiment.

Since going public in June, the company has released financial results. So, let's get an understanding of what Tempus AI does and dive into the details of its earnings report and recent news.

Tempus: Harnessing the Power of AI for Precision Medicine

The company operates as one reportable segment; however, it breaks down its revenue into Genomics and Data & Services. The company's Tempus platform underpins both businesses.

The Tempus platform takes in healthcare data in real time. It then processes the data using its proprietary AI and machine learning tools. One part of this process is to “de-identify” the data.

This means removing personal patient information to provide anonymity. This is crucial because Tempus can only sell the data to other parties after completing this. The data Tempus has is approximately ten times the size of the entire digital collection of the Library of Congress.

All of this goes towards Tempus AI’s primary goal: developing personalized, patient-specific insights that can be used to better treat diseases. This is known as "precision medicine." Tempus AI is working particularly hard on this regarding cancer research, also known as oncology.

In its Genomics business line, Tempus operates laboratories where it conducts genetic tests. This can be from physicians who want specific insights on how to care for a particular patient, or it can come from researchers to help aid them in developing new drugs. The tests extract genetic data, which the Tempus platform processes to create actionable insights. Genomics represented 68% of total revenues in 2023.

The Data and Services business licenses the genomic data the company collects through its tests and from external databases to which it has acquired access. It brings all the data together and provides a library of analytics tools. The company works with 19 of the 20 largest public pharmaceutical companies in this business line.

The company collects a fee for the initial genetic testing and then sells the data. After a few years, the data brings in more revenue than the testing fees.

Tempus AI Exceeds Q2 Revenue Targets Despite Mixed Earnings

According to MT Newswires, Tempus AI beat estimates on both adjusted earnings per share (EPS) and revenue in its Q2 2024 results, released on Aug. 6. Adjusted EPS came in at -$0.63 compared to consensus estimates of -$1.79. Sales of $166 million beat estimates by nearly $6 million for a surprise of 3.5%. Revenue grew 25% from the previous year's quarter.

However, on a non-adjusted basis, the company posted a loss over two times higher than expected at -$6.86 per share. This was due to a massive amount of stock-based compensation in the quarter.

The company said it expects to generate about $700 million in revenue in 2024, more than 1% higher than analysts polled by Capital IQ expected.

Keep an Eye on Tempus’ Stock-Based Compensation in Future Earnings

Tempus shares recently had a big day, up 22% after it announced a commercial collaboration with Personalis NASDAQ: PSNL, a genetic testing company. Tempus will also invest $36 million in Personalis and own about 20% of its outstanding shares.

The average price target among analysts is $45.56, implying a 29% downside. However, this could change if more analysts raise price targets based on the deal.

Investors should pay attention to Tempus’ stock-based compensation the next time it reports earnings to understand if this was a one-time occurrence or if this is how it will primarily pay workers now that it is publicly traded.

Stock-based compensation makes it hard to determine how close a company is to profitability by partially turning labor costs into a non-cash expense. It also dilutes shareholders.