What's Behind Pacific Biosciences of California's Stock Rally Today?

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What happened

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Shares of Pacific Biosciences of California (NASDAQ: PACB) are on the rise again. This is the third trading session in a row that the stock has marched upwards since announcing record revenues and a big order for its next-generation genomic sequencers last week. The stock has tacked on a 11.7% gain as of 2:45 p.m. EDT on Monday.

So what

The stock has risen about 40% since Aug. 2. After the bell that afternoon, Pacific Biosciences announced a new agreement with genomic services giant Novogene. The latter company agreed to double its Sequel-driven sequencing capacity with a purchase of 10 more systems.

The big purchase order came on the heels of an inspiring second-quarter earnings report. During the three months ended June, Pacific Biosciences recorded $20.1 million in product, service, and other revenue, which was 17% higher than the same period last year.

After pharma and diagnostics giant Roche terminated its partnership with Pacific Biosciences, investors were rightfully concerned that PacBio's sequencers -- which are highly accurate, but relatively slow -- would flounder. This encouraged plenty of traders to bet against the company, and it looks like the stock has been climbing as short-sellers unwind their positions.

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Now what

The Sequel System might not get much play in the consumer healthcare market, but last week's results suggest the company can deliver sustainable positive cash flows regardless. Genome-based research is booming, and while PacBio's proprietary single-molecule technology might be relatively slow, it delivers a level of accuracy that academic researchers appreciate.

If this post-earnings rally is the result of short-sellers closing out their positions, don't be surprised if the stock settles back down in the days ahead. Investors would do well to ignore the day-to-day fluctuations, and keep their eyes open for signs the company can indeed become profitable before it depletes the $102.6 million in cash it had on the books at the end of June.

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Cory Renauer has no position in any stocks mentioned. The Motley Fool recommends Pacific Biosciences of California. The Motley Fool has a disclosure policy.