Genomic Ambitions, Financial Realities: A Sell Thesis on Caris Life Sciences
Caris Life Sciences, Inc. (CAI: $34.21 per share) positions itself as a future leader in precision medicine, but the odds are firmly against it. The company faces an intensely competitive landscape dominated by larger, better-capitalized rivals, ongoing accounting weaknesses, persistent losses, and limited transparency as an emerging growth company. Despite these challenges, the market has priced Caris Life as if it will achieve extraordinary scale and profitability for decades to come. The gap between these euphoric expectations and the company’s difficult realities creates significant downside risk for investors. Accordingly, I find Caris LIfe, “Unattractive”.
A Fiercely Competitive Market
One of the paradoxes of investing is that highly competitive industries produce what economists call a “consumer surplus”, and yet these firms often find it most difficult to create sustainable value. As Peter Thiel once said, “competition is for losers”. In fact, recent research by Boston University researchers has found that technological rivalry measured by research & development (R&D) investments by peers, increases the risk of obsolescence, making firms more reluctant to invest in new technology for fear that such investments will quickly become obsolete. This implies that firms in highly competitive industries may not experience the future profits they expect because increased competition will make customers less likely to buy new technology.
Unfortunately, Caris Life operates in the highly competitive precision medicine industry, one where management is alive to it being, “characterized by rapid changes, including technological and scientific breakthroughs, frequent new product introductions and enhancements, and evolving industry standards.” Competition compels investments to keep up with peers, in the race for physician, patient, and biopharma clients, and competition increases the more attractive the potential profits are. These investments carry with them an expectation of future profits, yet, as economists have found, managers typically overestimate the potential gains from investments, leading to future losses. As people become more aware of the importance of genetic information, competition to serve the market with genomic profiling and sequencing services has grown.
Caris Life faces competition from a myriad of firms, some of which are better resourced, able to invest more into R&D than it can, and with a greater ability to sell their products. If research that firms become more cautious as competition intensifies is correct, this could favour products from more established firms. Caris Life’s tissue-based molecular profiling services face competition from firms such as Roche Holding AG’s (RHHBY) Foundation Medicine and Tempus AI, Inc. (TEM). The firm also faces competition from academic centers, such as the Memorial Sloan Kettering Cancer Center and the NewYork-Presbyterian Hospital, while Weill Cornell Medicine provides genomic profiling to its patients. The firm’s blood-based early detection services face competition from firms such as GRAIL, Inc. (GRAL), Freenome, Guardant Health, Inc. (GH), Exact Sciences Corporation (EXAS), and Delfi Diagnostics. The firm’s blood-based molecular profiling for therapy selection services face competition from Guardant Health and Foundation Medicine. In blood-based molecular profiling for MRD tracking and treatment monitoring, the company faces competition from Natera, Inc. (NTRA), Guardant Health, and Adaptive Biotechnologies Corporation (ADPT). The firm’s core biopharma services face competition from firms such as Foundation Medicine, Guardant Health, Tempus AI, Natera, and Personalis, Inc. (PSNL). The firm’s genomic data and AI services face competition from Tempus AI and Foundation Medicine. Finally, other testing firms in precision oncology are Illumina, Inc. (ILMN), NeoGenomics, Inc. (NEO), Myriad Genetics, Inc. (MYGN), the Laboratory Corporation of America, Quest Diagnostics Incorporated (DGX), and BostonGene. This extensive list could grow as awareness of the importance of genomic information grows and the market opportunity expands.
Limited Transparency from Emerging Growth Company Status
Caris Life is what is known as an “emerging growth company”, which means that the Securities and Exchange Commission (SEC) does not require it to meet certain disclosure requirements required of other SEC-registered firms, requirements that may be beneficial to shareholders. In its S-1/A filing, management notes that,
Under these exemptions, we are not required to comply with the auditor attestation requirements of SOX Section 404 or the auditor requirements to communicate critical audit matters in the auditor’s report on the financial statements, have reduced disclosure obligations regarding executive compensation, and have exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. As a result, the information we provide shareholders will be different than the information that is available with respect to other public companies. We have taken advantage of reduced reporting burdens in this prospectus. In particular, in this prospectus, we have provided only two years of audited financial statements and we have not included all of the executive compensation related information that would be required if we were not an emerging growth company.
This is especially pertinent given that the firm has already identified material weaknesses in its internal control over financial reporting. For the uninitiated, the company explained that,
A material weakness, as defined by Rule 12b-2 under the Exchange Act, is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
These material weaknesses, relate to a
…lack of sufficient qualified accounting resources, including those with technical expertise necessary to account for and disclose accounting transactions which require complex calculations or thorough evaluation of the accounting literature.
These material weaknesses are still being remediated, as management notes in its Q2 2025 report, with management reviewing, documenting and testing its internal controls. The lower bar for transparency puts some doubt onto the financial reporting.
Exceptional Growth Without Economic Value
Since 2020, Caris Life’s revenue has compounded by 26.64% a year, a 5-year sales CAGR greater than the global mean and median of 9.2% and 7.3% respectively, for firms with sales of between $325 million and $700 million. Whereas firms tend to grow slower as they get larger, Caris’ growth has accelerated with size, with the firm enjoying a 3-year sales CAGR of 27.35%.
It cannot be said of Caris Life that exceptional profitability has followed exceptional growth. While the firm’s net operating profit after tax (NOPAT) has substantially improved from -$308.64 million in 2023 to -$171.48 million in the last twelve months (LTM), it has yet to turn a profit. Driving this substantial improvement has been a rise in NOPAT margin from -100.82% to -32.12%. In turn, the firm’s invested capital turns, a reflection of balance sheet efficiency, have improved from 1.36 to 2.8. The net result of burgeoning NOPAT margins and invested capital turns is a return on invested capital (ROIC) that has also improved markedly, from -137.12% to -90.01%.
Since 2023, the firm has burnt through -$659.33 million in cash. Improvements, however, can be seen, with free cash flow (FCF) rising from -$274.11 million to -$124.89 million, with a current yield of -1.18%.
As Warren Buffett noted in his 1992 letter to the shareholders of Berkshire Hathaway (BRK.A), that,
Growth benefits investors only when the business in point can invest at incremental returns that are enticing – in other words, only when each dollar used to finance the growth creates over a dollar of long-term market value. In the case of a low-return business requiring incremental funds, growth hurts the investor.
Investors should remember this rule. Value is created when returns are in excess of what can be got in the market, and destroyed when returns are below what can be got in the market. With such profoundly negative ROIC, it is probable that the firm has never created value. In the LTM, the firm earned an economic profit of -$190.73 million, or -$0.68 per share, compared to -$18.57 in GAAP diluted earnings per share.
Priced for Gargantuan Scale
The price of a thing carries with it expectations about the performance of that thing. That is true of share prices. Using my reverse discounted cash flow (DCF) model, I was able to determine the expectations implied by the current price, and use a variety of scenarios to show the potential downsides to investing in the stock. The reader may view the accompanying spreadsheet to see the logic of the following argument.
In the base scenario, where I determined the hurdles Caris Life is expected to exceed in order to justify the current price,
- Revenue grows by 0% in 2025, 43.52% in 2026, 23.24% in 2027, 17.19% in 2028, 13.00% in 2029, and 17.02% in 2030, in line with Seeking Alpha’s revenue consensus estimates, before growing at 27.35% a year thereafter, and,
- NOPAT margin immediately improves to 2%.
I found that in this base scenario, Caris Life has a market-implied competitive advantage period (MICAP) of 33 years, at which point it records $984.09 billion in revenue and earns $19.68 billion in NOPAT in 2058. By way of comparison, the world’s largest company by revenue is Walmart (WMT), who earned $693.15 billion in revenue in the LTM.
Given where the firm’s NOPAT margins are, and the competitiveness of the market, it is prudent to wonder what downsides exist if the firm does not so markedly and immediately improve NOPAT margin. If we suppose that,
- Revenue grows by 27.35% a year, and,
- NOPAT margin improves immediately to 1%,
Caris Life is worth $27.79 a share, a downside of 18.14% from the current price, with the company posting $1.53 trillion in revenue and earning $15.32 billion in NOPAT.
Finally, if we suppose profitability initiatives are less successful, and,
- Revenue grows by 27.35% a year, and,
- NOPAT margin improves immediately to 0%,
Caris Life is worth $2.78 a share, a downside of 91.81% from the current price, with the company posting $1.53 trillion in revenue and earning nothing in NOPAT.
Conclusion
Caris Life Sciences has delivered strong top-line growth but has failed to convert that momentum into durable profitability or economic value. Competition is intensifying, rivals are better resourced, and management continues to remediate material weaknesses in financial reporting. Yet the stock price reflects assumptions of flawless execution and revenue on a scale rivaling the world’s largest companies, expectations that are implausible given the firm’s track record. Investors are being asked to pay upfront for profits that may never arrive. For these reasons, I assign an “Unattractive” rating to the stock.