Affymetrix Stock Analysis: Is it a Buy, Hold or Sell?

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This is an analysis of the company Affymetrix (AFFX). The company is an American company that manufactures DNA microarrays; it is based in Santa Clara, California, United States. I have reviewed the company’s financial statements to see if it is an investable company.

I have found that Affymetrix stock has incurred millions in operating losses for the past five years, including a loss of $39.0 million for the fiscal year 2012. One of its main competitors, Illumina, has incurred millions in operating income gains for the past ten fiscal years.

Which leads to the obvious question, what is Affymetrix doing wrong?

However, we currently hold $107 million in cash, which leaves room for expansion and improved sustainability. In order for Affymetrix to operate efficiently and more importantly, profitably, major changes need to occur.

 
 

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For one, it is being run like a research and development company rather than a profitable business. The industry it operates in is due to grow in coming years as demand shifts and the company is in a position where it will continue downhill unless major changes are made.

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The growth has reached a stand still and it’s vital for the sustainability of Affymetrix to venture into customer centric-marketing and acquisitions. With a market cap of $736 million, the company has room for expansion.  Over the past 10 years, the diagnostics and research industry has growth while Affymetrix has fallen. It is hoarding a cash balance of 107 million in cash and cash equivalents. The company is very dependent on research institutions for sales revenue. With the introduction of new, innovative, and enhanced products new relationships and future acquisitions we will generate more sales revenue. This will penetrate the market and ensure a greater return for the company.

Additionally, this will increase the intrinsic value of the company and ensure greater future cash flows.  The company is funded by 55.5% through equity and 45.5% through debt. The method of funding the future capital expenditures will be through issuing company stock. Company stock will be used to purchase any future acquisitions because the company needs to leverage its debt level in an effort to strengthen our balance sheet. The stock once traded at $160 back in 2000 and is now at a modest $8-13 range. It is important to realize that this drastic drop in the stock price indicates a lack of shareholder confidence. Affymetrix stock price is due to rise as it’s growth and market share increases.

Exchange Rate Risks

Affymetrix has international operations in the United Kingdom, Japan, Singapore, and China. During the normal course of business, the company is exposed to foreign exchange rate risks as a result of transactions that are denominated in currencies other than the United States dollar. When Affymetrix is required to report its financial results in US dollars it faces translational risk. This poses a serious threat for Affymetrix conducting business in foreign markets. Exchange rates usually change between quarterly financial statements, causing significant variances between the reported figures.

In order to hedge some of the risks involved with currency exchange rate risk, Affymetrix enters into foreign currency forward contracts. These contracts are usually short-term in nature and mature within a quarter. These hedges are purely made with the intent of hedging risk are not for trading or speculative purposes. The values of these derivatives are not reflected on the financial statements as fair value hedges.

Overall, I would suggest that millennials keep an eye on this stock. It has definitely been on my stock watch list for a few years. I am not fully convinced that this company will be successful in this market segment.

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