2020 was a challenging year for the Versarien (LSE:VRS) share price. In the early stages of the pandemic, it collapsed by 70%, reaching its lowest point back in March last year. Since then, the share price has partially recovered. But it still trades well below its pre-pandemic levels.
Is this an opportunity to buy the stock at a discounted price? And should I be adding the business to my portfolio? Let’s take a look.
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An engineering research house
Versarien is an engineering materials business. It owns and operates eight subsidiaries specialising in developing and commercialising new materials. Its combined expertise lies primarily in graphene, plastics, and metals. Its proprietary technologies and developed products have proven to be essential across many sectors, including electronics, aerospace, energy, and industrial engineering.
Covid-19 has caused multiple disruptions across all these sectors as well as Versarien’s own research projects. Consequently, the firm reported its biggest loss since its IPO in 2013, which likely triggered the drop in the share price.
In January this year, Versarien’s share price looked like it was on the road to recovery. Unfortunately, the rise was short-lived. And once again, it began to fall following the publication of another report. Losses have continued to expand while revenues decline.
However, there were some promising trends. Graphene product sales significantly increased thanks to the successful launch of its specialised facemasks. And it also began working on a new engineering project with Rolls-Royce. Could this be a sign that the worse has passed?
Risks to consider
Covid-19 has undoubtedly wreaked havoc on the business. However, from what I can tell, the collapsing share price appears to be due to over-valuation rather than any underlying problems with the company. The increasing losses are bad, but the cause is temporary. And with plenty of cash on the balance sheet, I don’t think it’s in any immediate financial danger.
Meanwhile, in 2019, the Versarien share price was trading as high as 132.5p. That’s roughly a market capitalisation of £205m despite being unprofitable and only generating £9m in revenue that year. Today’s the company is valued closer to £70m, which still seems expensive but not as ludicrous. At least that’s what I think.
It’s also worth noting that it is currently unclear when Versarien will become profitable. And so the firm is and will remain dependent on outsiders to raise additional capital. So far, this has been achieved through a mixture of debt and equity issues. However, these may not be available in the future, and the latter appears to be creating a dilution effect. After all, the shares outstanding have increased by 60% over the past five years.
Versarien share price: time to buy?
Operating within the engineering industry is tough. The constant technological innovation and vast competition can often lead to companies becoming obsolete or superseded by rivals. However, Versarien’s ability to attract and retain industry veterans partners like Rolls-Royce, as well as expand its offerings into the Chinese markets, is encouraging.
Personally, I think it’s still too soon to invest. Therefore I’m not going to buy any Versarien shares for my portfolio today. But I will be keeping a close eye on how it performs in the future.