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Is this why the Novacyt share price keeps falling?

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The Novacyt (LSE: NCYT) share price has slumped over the past few weeks. The stock jumped more than 40% in the second week of August to a high of more than 420p. However, it’s since lost more than 23%, and is now trading close to its 52-week low of 290p. Over the past 12 months, the stock has lost 12% of its value.

However, since the beginning of 2020, the stock’s returned more than 2,150%, so long-term investors have been well-rewarded for holding the shares over the past two years. 

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The question is, will the Novacyt share price keep falling, or can the company turn things around? 

Novacyt share price weakness 

Whenever I first come across a stock, I always try to understand the bull and bear arguments of the investment. As I’ve been covering Novacyt for the past two years, I’ve got to know the business reasonably well. 

At the beginning of 2020, shares in the company surged after Novacyt’s Primerdesign division received orders totalling €103m for its coronavirus test.

Thanks to this contract, revenue increased 900% year-on-year in the second quarter of 2020 to €36m. Then in April of this year, management announced revenues had risen further to €83m in the first quarter of 2021.

The company’s problems started earlier this year when it tried to extend a testing contract with the government. The agreement wasn’t extended even though it continued to supply testing equipment in line with demand from the Department of Health and Social Care (DHSC). 

The company is currently in a legal dispute with the Department of Health and Social Care. According to its latest trading update, it continues to work with its legal advisors. The parties still haven’t reached an agreement to extend the contract. 

Based on all of the above, it’s clear to me why the Novacyt share price has been under pressure recently. When any company loses its largest contract, the market can be spooked. 

What’s more, in theory, if an organisation’s sales and profits suddenly slump, the company will be worth less than it was. 

Slumping profits

Analysts are expecting a rapid drop-off in profitability over the next two years. The company earned £132m in 2020, but this is expected to fall to £60m in 2021, and £15m in 2022. This goes some way to explaining why the Novacyt share price has performed so poorly over the past few months. 

Of course, these are just projections at this stage. There’s no guarantee the company will hit these targets. It could earn significantly more, or significantly less. 

In the best-case scenario, the group will sort out its dispute with the DHSC, leading to a jump in sales and profitability. This could provide funding to support the firm’s expansion into other areas, establishing a more sustainable revenue stream. 

Still, despite this opportunity, I wouldn’t buy the stock for my portfolio today. As the organisation’s profits continue to slide, I think the Novacyt share price will follow suit.

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Rupert Hargreaves 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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