Is the Oxford Nanopore share price a bargain at 550p?

Jon Smith takes a closer look at the Oxford Nanopore share price after the slow grind lower in recent weeks to see if how is the time for him to buy.

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Oxford Nanopore (LSE:ONT) went public back in September last year. Since the launch price of the IPO was 425p, it has offered the early investors a very healthy short-term return. With a price at the moment of 553p, that’s a 30% gain. The Oxford Nanopore share price topped out at 736p last month, before stumbling lower. So is it a stock that I should consider buying now?

Initial buzz around shares fading

The business garnered a lot of attention due to the nature of its operations. It’s a medical company that develops and sells nanopore sequencing technology. It takes DNA and RNA code and uses the sequencing technology to identify organisms. It doesn’t just identify things, but can also be used to show if something is harmful or not, and what attributes it contains.

This is very useful information and technology. With a particular focus on identifying viruses, it’s clear that demand for this will be high not just at the moment but in years to come.

Unfortunately, the share price hasn’t been able to share such optimism after the initial bump higher. I think part of this is down to the fact that some of the buzz was simply due to the UK having a large biotech listing. After the initial few weeks, I think some investors realised there was a disconnect between the valuation and the share price. 

For example, in a recent trading update, revenue for the full-year 2021 is expected to be “above” £126m. For arguments sake, let’s call it £126m. With a market capitalization of £4.4bn, this gives a price-to-sales ratio of almost 35 times. This makes the Oxford Nanopore share price look expensive to me.

Reasons to like the Oxford Nanopore share price

Despite the valuation, there are reasons to see the current share price as a good entry point. Firstly, the business is growing. In the recent update, it noted that “the Group expects to report core Life Science Research Tools (“LSRT”) above £120 million, compared to LSRT revenue of £65.5 million in FY20, representing annual growth in excess of 83%”.

Given that the business is gaining traction, a continuation of those kind of growth figures over the next year would be positive for the share price. If investors are happy to look to the potential profits years down the line, then current valuation metrics aren’t as important.

Aside from the financial growth, another reason to buy is as a defensive stock against Covid-19. The business did have contracts with the government last year with tests, which has now ended. However, if we see further serious mutations of the virus, then Oxford Nanopore could benefit from new contracts. Holding the stock could help my overall portfolio in case the other stocks fall on negative Covid-19 news later this year.

From a traditional view, the Oxford Nanopore share price doesn’t look like a bargain at 553p. However, if I believe in the long-term growth prospects, or the use of the stock as a defensive play for Covid-19, it could hold value. Ultimately, I’m not convinced, so won’t be investing.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Jon Smith and The Motley Fool UK have 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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