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

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What happened

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.

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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.

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.