Why Guardant Health Stock Just Plunged 10%

Precision medicine company shares Guardian Health (GH -11.27%)which specializes in liquid biopsies for cancer testing, was down 10.6% by 10:05 a.m. ET Monday morning.

Monday was the first day of trading as investors reacted to Guardant’s announcement late Friday that it plans to sell stock and raise $400 million in cash to fund its operations.

Guardant needs money

Guardant’s announcement came in the form of an 8-K filing with the Securities and Exchange Commission (SEC). “From time to time, at his discretion,” said Guardant, he “May offer and sell (emphasis added) up to $400.0 million in new shares at market prices.

At Guardant’s current market cap of $3.2 billion, this therefore means the company will increase its share count by about 12.5% ​​– and dilute existing shareholders by the same 12.5%. And Guardant won’t even get to keep all $400 million. Three percent of the money raised will go to the investment bank Jefferieswho organizes the stock sale.

Why Guardant needs cash

Investors are understandably happy about the potential stock dilution, but they shouldn’t be surprised by it. Although growing rapidly — annual sales have tripled to $644 million over the past five years — Guardant is still not profitable. And it burns cash.

Quite a lot of money.

Total cash consumption over the past 12 months is approaching $300 million. That’s down a bit from last year, but still not positive, and most analysts agree that Guardant won’t become free-cash-flow-positive for a few more years — in 2028, to be exact.

To get to that point, analysts believe Guardant will need to roughly double the size of its annual revenue stream, so that day is still a long way off. And until Guardant reaches enough scale to generate the cash it needs on its own, investors should anticipate additional stock sales and fundraising.

And yes, additional stock dilution, too.