I’m planning to take advantage of share price weakness by possibly adding a new beaten-down growth stock to my portfolio for 2024 and beyond. Oxford Nanopore (LSE: ONT) shares have long fascinated me, and I see they’ve lost nearly a quarter of their value over the last year.
Could they be what I’m looking for? Let’s take a closer look.
A baptism of fire
It’s fair to say it’s been a tough start to life as a public company for the biotech firm. Its shares are down around 66% since listing in September 2021.
In hindsight, the timing of the IPO proved to be a double-edged sword. It was right at the top of the market, not long before interest rates started climbing in response to rising inflation. This enabled the loss-making company to raise £524m at a valuation of almost £5bn. That’s the good bit.
The not-so-good part is that, due to higher rates, we’re entered a different world today. Most growth stocks remain deeply out of favour. And it would be totally unimaginable for the firm to raise such a figure at that valuation in today’s market.
Starting from 203p now, it could take years (if ever) before the Oxford Nanopore share price gets back above 600p again.
Nano…what?
As a quick reminder, the Oxford-based company sells a range of cutting-edge devices for DNA and RNA sequencing. According to the firm, these enable the “analysis of any living thing, by anyone, anywhere“.
Its technology is based on nanopore sequencing (hence the company’s name). This involves passing a DNA molecule through a tiny pore and measuring changes in electrical current as individual DNA bases move through it.
Admittedly, I’d need a degree in biology to understand exactly how what works. But the important thing is that this technology offers rapid, real-time sequencing of long DNA strands. And that’s very useful for in-the-field researchers.
Solid H1 growth
In H1, the firm’s underlying Life Science Research Tools (LSRT) revenue grew 46% year on year to £75.6m. That was on a constant currency basis and stripping out prior revenue from legacy Covid-testing and a large genome programme.
Gross margin dipped slightly to 57%, while its overall loss grew 39% to £70.1m as it invested heavily in marketing. Management expects full-year LSRT revenue growth of more than 40%.
Looking forward, the firm is targeting 2026 for adjusted EBITDA break-even. And at the end of June it had £484m of cash and cash equivalents left to help it get there. Plus there was a subsequent £70m investment from French biotech bioMérieux.
On the move?
In March, it was reported that the firm might consider moving its listing to the US. The possibility of a higher valuation stateside was mentioned. That old chestnut.
But is the grass always greener across the pond? I mean, look at these British growth firms that shunned London for an overseas listing.
- Cazoo (down 99.8%)
- Exscientia (down 80.6%)
- Autolus Therapeutics (down 88.8%)
Meanwhile, Oxford Nanopore stock is trading on a price-to-sales (P/S) ratio of 11. That’s an extremely high valuation, one that I doubt could be topped in the US.
Either way, it’s an excessive valuation I can’t ignore. But I’m keeping the stock on my watchlist, as I’m still a big fan of the innovative firm.
