To see a successful IPO, look no further than Oxford Nanopore (LSE: ONT). The shares opened above their offer price of 425p on 30 September. And the Oxford Nanopore share price reached as high as 645p the day after, though it has dropped back to 550p since.
Biotechnology stocks have attracted a lot of attention during the pandemic. And with a view to adding a growth stock to my income-dominated portfolio, I’m wondering whether Oxford Nanopore is the one for me to buy.
I try to invest in things I understand. But technology advances make the understanding harder and harder. Even with a background in biological sciences, some of the latest developments leave my head spinning.
The company specialises in DNA and RNA sequencing. And that’s come to the fore since Covid-19 arrived. It provides a means to identify different strains of the virus, for example. For it to be any use, though, scientists need to be able to identify a DNA sequence faster than a virus can evolve. If a new strain showed up every month, but it took three months of tedious lab work to sequence it… well, that’s the value of a technology like this. A value for the Oxford Nanopore share price, mind, is harder to pin down.
Genome sequencing
Genome sequencing is not new, and there are many companies out there that do various forms of it. Even nanopore sequencing has been about 25 years in the making. It does seem impressive, though, with nanopore devices able to be used pretty much anywhere without needing access to big labs. But who holds what patents, how exclusive are they, and what do they specifically protect? I have no idea, and that’s one problem I face when I think of investing.
If I don’t understand enough about a technology, or about a specific company’s version of it, at least I understand how a company works. You know, revenue, profit, margins, cash flow, debt… all that stuff. On that front, there’s not much to go on just yet. The firm offered its first products in 2014. By 2020, revenue had grown to a still modest £113.9m. And Nanopore recorded a net loss of £61.2m.
Still, that revenue had doubled from 2019. And for the first six months of the current year, sales are up 22%. Estimates suggest there’s a lot more to come. A report by Grand View Research suggests revenue in the sector could be set to exceed £10bn by 2027. If the company can grab a sizeable share of that, the Oxford Nanopore share price might soar.
Oxford Nanopore share price valuation
But back to valuation. My Motley Fool colleague Zaven Boyrazian has worked out that the stock is on a price-to-sales ratio (P/S) of around 40. I’m generally more comfortable with companies on a P/S of, maybe, two or less.
So I’m seeing an advanced technology stock with exciting market potential, but with the shares on a very high valuation. Stocks like that can easily go either way. Right now, sticking closely to the buy-what-you-know theme, I just don’t understand enough to buy. But I will do more research into Oxford Nanopore.
Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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