After an explosive IPO, the Oxford Nanopore (LSE:ONT) share price continues to surge. Last Friday, the stock popped as much as 16% in the first 15 minutes of trading. While selling pressure did bring the valuation back down in the afternoon, its performance since its public listing is still around +40%. So what caused this latest spike? And should I be considering this company for my portfolio? Let’s take a look.
Oxford Nanopore’s stellar share price performance
I’ve previously explored this business. But as a quick reminder, it’s a pioneering biotech institution that designs and manufactures DNA and RNA sequencing machines. This technology is paramount in the world of drug development, especially when it comes to understanding how a virus or disease works. Unsurprisingly, it’s been actively used throughout the last 18 months in the fight against Covid-19.
Last week, management provided a short and sweet trading update on the progress being made. While the pandemic may be slowly coming to an end, the demand for sequencing technology remains strong. And it’s not just Covid-19 driving sales. The business is also continuing to see demand coming from human genomic programmes. So much so that September saw a record-breaking sales performance.
That’s obviously excellent news for the business. And it would seem management agrees. Why? Because it just raised revenue growth guidance from 30-40% to 60-70% for the whole of 2021. So, seeing the Oxford Nanopore share price climb even higher on this news is hardly surprising to me.
Taking a step back
As exciting as this high growth is, my concerns surrounding this business’s valuation remain. In 2020, Oxford Nanopore reported total revenue of £113.9m. Assuming it can achieve the higher end of its forecast, that would place sales for 2021 at around £193.6m.
A near £80m jump in revenue is nothing to scoff at. But when taking the Oxford Nanopore share price into account, investors may be getting ahead of themselves. Today, the firm stands at a market capitalisation of around £4.8bn. That places the price-to-sales ratio at just under 25 times.
Needless to say, there’s a substantial premium being placed on this business by investors. If expectations aren’t met moving forward, the Oxford Nanopore share price could be the subject of a significant amount of volatility, especially since it has yet to turn profitable.
The bottom line
This latest update continues to show promise within the enterprise. And if Oxford Nanopore can continue growing at its current rate in a post-pandemic environment, I wouldn’t be surprised to see its share price climb even higher.
But with no precise data available, it’s hard to determine exactly what part of the business is the dominant force in driving sales. If this force is as a result of Covid-19, then the company may struggle to maintain its growth over the long term. Therefore, I’m still keeping this firm on my watchlist for now.
Zaven Boyrazian 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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