The Avacta (LSE:AVCT) share price has had a pretty rough time recently. Despite reaching an all-time high earlier this year, the stock is down almost 50% in the last three months, wiping out all of the gains made over the previous year. But what caused this growth stock to suddenly make a U-turn? And is this a buying opportunity for my portfolio? Let’s take a closer look.
Despite what the Avacta share price might suggest, the underlying business seems to be making good progress. The latest results from clinical trials show that Avacta’s lateral flow antigen tests can successfully detect the Delta variant of Covid-19. This is particularly exciting as competing tests seems to have a low detection rate for this strain of the virus.
Combining this milestone with the newly signed distribution agreement with Calibre Scientific, it seems Avacta’s revenue growth should be able to continue meeting expectations. Needless to say, that’s fantastic news for this biotech business. So why did the share price crash?
The fall of the Avacta share price
I’ve previously looked at this company and highlighted that the stock was carrying an exceptionally lofty valuation. Shareholder expectations were unreasonably high, in my opinion. And unsurprisingly, at the first sign of trouble, many jumped ship.
Despite efforts to achieve a CE Mark for its antigen testing kit, Avacta could not secure it in May as initially planned. Without this regulatory approval, its products cannot be used throughout Europe. And signing a distribution agreement for a product that can’t be distributed didn’t exactly entice investors. What followed was just over two months of decline for the Avacta share price.
In mid-July, the firm finally received an ISO 13485 certification to use its Affimer reagents in its lateral flow tests. As a result, a CE Mark was transferred to the company allowing its tests to be used by professionals throughout the UK and Europe. That’s one of the main reasons why the share price has started to stabilise. After all, with alternative lateral flow tests being far less effective, the company now has an enormous growth opportunity before it.
That might be an indicator of a buying opportunity for this growth stock. However, upon closer inspection, I’m still not tempted. Why? Because despite the recent crash, the Avacta share price still looks too expensive. Today, the company has a market capitalisation of just over £320m. And yet total revenue for the year is expected to be only around £4.3m with profits nowhere in sight. That places the price-to-sales ratio at an enormous value of 74!
Therefore I’m keeping Avacta on my watchlist for now. As promising as this business and its future potential may be, I believe there are far cheaper growth opportunities to be found elsewhere.
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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.