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Why has the Oxford Nanopore share price just jumped 10%?

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I’ve been looking at Oxford Nanopore (LSE: ONT) with a view to adding the biotechnology company to my portfolio. Its share price has jumped over 10% at one point on Friday morning, should I stop prevaricating and buy before it’s too late?

Part of the problem for me is down to understanding what I’d be buying, though I think I have a reasonable handle on the potential for nanopore DNA and RNA sequencing. But one thing I do understand is that ONT shares are now 50% ahead of their IPO offer price. And that’s in less than a fortnight.

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So what’s the latest jump all about? Late Thursday, the company released an upgrade to its Life Science Research Tools (LSRT) guidance.

The new statement read: “The significant increase in demand seen in the first half of the year to 30 June 2021 has continued through the third quarter, and September saw the strongest ever trading month in the Group’s history.

It’s not too surprising to learn that a key driver for this continuing strong demand is the SARS-CoV-2 virus, and the need to keep sequencing it. But the firm also said it’s experiencing increasing demand for its “products for large-scale human genomics programmes.”

Mixed signals

That gives me mixed signals. Demand driven by Covid-19’s good, for sure. But we will get past the pandemic, and the urgency will surely fade. When that happens, will the hot cakes that ONT shares are currently selling like turn into hot potatoes, to be dropped as soon as the next big investment idea comes along?

That’s a fear I have, borne from years of seeing growth shares coming into and going out of fashion. But against that, there’s clearly a wide range of applications to which nanopore sequencing technology can be put. It’s that wider applicability, surely, that will determine the Oxford Nanopore share price in the long term.

Revenue growth targets

Anyway, back to the short term, and the latest upgrade. In its IPO prospectus, Oxford Nanopore had told us it was targeting LSRT revenue growth of 30-40% this year. The company has upped that significantly, and now says it expects LSRT revenue to grow 60-70%, on a constant currency basis.

There’s an extra snippet too, which could help make 2022 an exciting year. It’s about a large-scale human genomics programme in the UAE. The company says it’s in discussions with its UAE customer, and “anticipates that a new contract, if any, would result in revenues primarily after FY21.”

Oxford Nanopore share price valuation

Does this mean I’ll buy now? I think we could be facing a few interesting months for the Oxford Nanopore share price. But there’s still the gnarly old problem of profit. Or, rather, the lack of it. So there are no profit-based valuation measures yet. And on the basis of a price-to-sales ratio of about 40, it looks very high.

I do see great potential for the technology. But I fear the price could falter once the high-profile Covid business starts to fade from the headlines. I’ll stay on the sidelines and continue to watch.

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Alan Oscroft 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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