BTIG analyst Sung Ji Nam recently initiated coverage of Bionano Genomics (NASDAQ:BNGO) with a buy rating and a 12-month price target of $10. If you were to buy BNGO stock as I write this, you’d be looking at 26% upside.

If it means anything, in my most recent article about BNGO, I suggested that enough good stuff had happened at the company related to its Saphyr Systems that it was worth more than $5. If you could pick up some of its stock between $5 and $6, it appeared to be a decent speculative bet. 

Since then, it’s gained almost 40%. I have to give credit where credit is due. InvestorPlace’s Louis Navellier’s positive comments about the company’s flagship product and its acquisition of a Utah-based provider of diagnostic services, I wouldn’t have been as aggressive in my prognosis. 

While Saphyr is gaining traction, Bionano isn’t perfect.  

Before you grab your phone, pull up your broker’s app, and make the stock buy, it’s probably a good idea to consider the pros and cons of doing so. 

The Pros of Owning BNGO Stock

It’s not very often that I recommend a stock that trades in single digits. I know I’ve recommended Sirius XM Holdings (NASDAQ:SIRI) as recently as July 2020. It’s gained about 12% since. Not a home run by any means.

In recent years, due to the rise of cannabis stocks, I’m confident I’ve recommended some of the names in that space trading in single digits. I’ve probably got middling success there as well.

As I stated at the top, BTIG analyst Sung Ji Nam likes what Bionano’s been up to in cytogenetics testing.

“We believe BNGO is on the cusp of disrupting the cytogenetics testing market currently served by karyotyping, microarray and FISH techniques and representing BNGO stock-estimated near-term TAM of $700mm to $1bn, driven by an expanding body of clinical evidence supporting the higher accuracy and superior workflow efficiency of BNGO’s OGM (optical genome mapping) technology,” TipRanks reported the analyst saying in a note to clients. 

For those of you unfamiliar with cytogenetics, the National Human Genome Research Institute describes it as “the branch of genetics that studies the structure of DNA (deoxyribonucleic acid) within the cell nucleus.”

It goes on to say it’s really just the act of looking at genetic material through a microscope, or in the case of Saphyr, running the genetic material through its system to detect chromosomal aberrations.-

The terms karyotyping, microarray, and FISH (fluorescence in situ hybridization) are mentioned in the analysts’ note to clients. 

Karyotyping is the process of determining whether someone has 46 chromosomes. For example, if a person has an extra Chromosome 21, that person likely has Down syndrome. Microarrays are microscope slides pre-printed with thousands of tiny dots, each a known DNA sequence or gene. Lastly, according to the National Human Genome Research Institute, FISH is “a technique for detecting and locating a specific DNA sequence on a chromosome.”

I really should have paid more attention in my high school science classes. 

Needless to say, the analyst believes that Bionano’s revenues are set to accelerate over the next few years as more hospitals and labs jump on the Saphyr bandwagon. Further, Nam stated it is “well-positioned to replace multiple traditional cytogenetic technology tools.”

Double digits, here we come.

The Downside Risk

Thanks to the company’s two equity sales in January, you can’t argue with the strength of its balance sheet. It finished March with $362 million in cash against just $14.9 million in debt for a net cash position of $347 million. 

The biggest risk that I see to the company and its stock is that it only generated $3.2 million of revenue in the first quarter. Future revenues will come from selling Saphyr Systems to academic and governmental research institutions. Those institutions have changing budgets based on funding, etc. Therefore, there is no guarantee the demand will keep rising.

InvestorPlace’s Muslim Farooque is one of the few IP contributors with a negative spin on the company. He believes that the company’s estimated $3-billion addressable market won’t be nearly as easy a nut to crack as most think.

Its competition is intense. On pg. 41 of its 2020 10-K, Bionano points out that it has at least five existing competitors in the genome mapping market: Pacific Biosciences of California, Oxford Nanopore Technologies, 10x Genomics, Genomic Vision and Dovetail Genomics.

Pacific Biosciences (NASDAQ:PACB) generated more than 9x the revenue as BNGO in the first quarter. PacBio is backed by an affiliate of SoftBank Group (OTCMKTS:SFTBY). In February, they invested $900 million in convertible senior notes in the company.  

I don’t know if you’ve noticed, but lately, SoftBank’s been right a lot more than it’s been wrong. Who’s Bionano got backing them up?

Farooque finished his article by suggesting that investors not jump into the deep end with BNGO until it gets its installed base of Saphyr Systems to its stated goal of 15o, or preferably beyond, by the end of 2021.  

He’s right. Sometimes in investing, you have to play a little defense. 

Bottom Line

Just as I recommended speculative investors pick up BNGO stock between $5 and $6 in my last article, I suggest interested investors give themselves a greater margin of safety by buying under $7. It won’t guarantee your success, but it will give you a bit more cushion on the downside.

In addition, I would definitely check out Pacific Bio and the rest of its competition. As I always like to say, you always have options.

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.