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The Oxford Nanopore share price explodes on IPO! Should I buy?

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The Oxford Nanopore (LSE:ONT) share price exploded last week. This recently listed public company saw its stock surge by 47% on the first day of trading. That places its market capitalisation at around £5bn. But what does this company do? And should I be jumping in on this IPO? Let’s explore.

What does it do?

Oxford Nanopore is a biotech firm that specialises in DNA and RNA sequencing. Using its technology, clients can accelerate the research process when developing new drugs or trying to understand diseases in areas such as genetics, cancer, and viral outbreaks. The latter has proven exceptionally useful since the start of the Covid-19 pandemic. And the firm has actually been at the forefront of tracking the variants of the virus.

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So how does it work? Oxford Nanopore designs and manufacturers a range of sequencing machines sold at a relatively low margin to customers. The prices range from £800 to as high as £156,000, depending on the required features. However, to use these machines, additional consumable sequencing kits and flow cells are needed. In effect, this creates a razor and blade business model, which historically has proven to be highly lucrative.

The sequencing industry is quite complex and still relatively young. But the growth opportunity for Oxford Nanopore is quite substantial. According to a report by Grand View Research, the sector is estimated to expand at a compound annual growth rate of 11.4% between 2020 and 2027. Reaching a total market size of just over £10bn. Given that the company only generated £113.9m in revenue last year, that leaves a large amount of the market untapped.

With that in mind, it’s easy to understand why many investors are pretty excited by this business. So I’m not surprised to see the Oxford Nanopore share price explode on its IPO.

The Oxford Nanopore share price has its risks

Some risks to consider

Revenues have jumped from £32.5m in 2018 to £113.9m in 2020. And this growth doesn’t appear to be slowing down since the sales from the first six months of 2021 are around 22% up from a year ago. However, unsurprisingly, running such a business is quite an expensive endeavour. Research & development expenses alone have consistently gobbled up more than the gross profits generated from sales. As a result, Oxford Nanopore remains unprofitable, which undoubtedly increases the risk surround its share price.

This risk is only amplified when considering the current valuation. It seems most investors are fixated on the growth potential rather than the underlying fundamentals. At its current share price, Oxford Nanopore is trading at a price-to-sales ratio higher than 40. If the firm can deliver on shareholder expectations, then its £5bn market capitalisation could be justified. But if it trips up, I wouldn’t be surprised to see a rapid decline in this stock.

Final thoughts on the share price

All things considered, this looks like an interesting company. Its technology sounds promising. And given that it has been referenced in over 2,100 research studies, it seems the scientific community agrees. However, the Oxford Nanopore share price today is simply too rich for me. Therefore, I’m keeping this stock on my watchlist for now.

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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.

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