Biotech company Oxford Nanopore (LSE: ONT) has not had a long life as a public company. After a very strong start in September, the shares have moved around a fair bit. But the share price had soared 45% above its listing price, at the time of writing this article earlier today.
How might the rest of 2022 look for the shares? Here is my view.
Business to keep expanding
In November, the company updated the market and raised its revenue guidance. Based on a significant expansion of work with a customer in the Emirates, the company set an expectation of life science research tools revenue for 2022 of £135m-£145m. It also raised the expectation for such revenue in 2023 to £170m-£190m. That compares to £65.5m of revenue reported for the 2020 financial year.
It means that if the company meets the top end of its expectations, its compound annual growth rate from 2020 to 2023 will be 43%. That is an impressive rate of revenue growth. Revenues are different to profits, however, and for now there is no indication that the company expects to be profitable any time soon. Indeed, as it pointed out in its listing prospectus, there is a risk that it might never be profitable. In 2020, it lost over £60m. So far though, being loss-making does not seem to have hurt the share price. I reckon that could continue in 2022. If strongly increasing revenue supports an attractive growth story, that in itself might be enough to keep driving the shares higher, even in the absence of profits.
£5bn market cap
Currently the company has a market capitalisation in excess of £5bn. I think that is a lot given its revenues and lack of profits. But clearly there is investor enthusiasm for sequencing companies like Oxford Nanopore. The market for the company’s services could expand massively in coming decades. If it establishes itself as one of the leading global players, that could help its share price grow in years to come. Rival Illumina, for example, has a capitalisation on the US NASDAQ market of around £43bn.
That might be enough for the company to maintain share price momentum in 2022. If it announces more good news, such as a big new contract win, I reckon the share price could even keep growing this year.
Share price risks
But there is definitely a risk the shares could fall too. With such high revenue growth expectations, any slowdown could hurt the investment case and cause investors to reassess the elevated valuation. The fact that recent guidance upgrades were driven by a single customer suggests a risk of concentration on a small number of key clients. That could make Oxford Nanopore revenue more susceptible to a tumble if one of its customers ends its relationship with the company.
Along with the lack of profitability, those risks are big enough to put me off buying Oxford Nanopore for my portfolio.
