Oxford Nanopore Technologies (LSE: ONT) was easily the best-performing stock in the FTSE 250 today (21 July). It soared 20% to reach 176p, the highest it has been since the start of 2024.
The one-year return now stands at around 50%. However, there’s still a long way to go to reclaim 710p, the level it hit in December 2021, soon after the firm went public.
Let’s take a closer look at what’s going on.
Encouraging investor update
Oxford Nanopore has developed a revolutionary DNA and RNA sequencing technology known as nanopore sequencing. This enables the real-time sequencing of extremely long fragments of genetic material, which is a major improvement over older technologies.
The news that sent investors scrambling for the buy button today was a half-year update released by the innovative company. For the six months to 30 June, it expects to log revenue of £105m, up 25% year on year (and 28% on a constant currency basis).
According to my data provider, that was 5% higher than what was expected (£100m). Management said growth was strongest across its PromethION product range, where revenue jumped by approximately 59%.
This is encouraging because PromethION is Oxford Nanopore’s high-throughput benchtop sequencing device. It’s built for organisations like hospitals and pharma firms. These tend to run large volumes of sequencing, which means they go through consumables such as flow cells more regularly.
Razor and blades
As more devices are sold and used, this should directly benefit the company’s recurring revenue. In other words, Oxford Nanopore is operating the classic razor-and-blade model, where the sequencer (razor) needs a constant flow of consumables (the blades).
I was thinking how powerful this model can be recently in Tesco, as I forked out a small fortune for a handful of Gillette ProGlide blades. The reason I did so is because I’ve tried the competition and they don’t come close (at least for my face).
So it’s a great sign for shareholders that customers are loving the PromethION platform. Another encouraging thing was that revenue in the Americas jumped by 17%, despite ongoing uncertainty in the US research environment.
The US is a key market because it’s home to many of the world’s largest pharma and biotech firms. It also leads in clinical trials and genomic research, all of which drive demand for sequencing.
Progress towards profits
The main risk here is that Oxford Nanopore is still loss-making, and only expects to become cash flow positive by 2028.
In the period, it said it made “progress on its path to profitability, delivering a reduction in the adjusted EBITDA loss, supported by disciplined cost management and gross profit growth“.
Investors could quickly sour on the stock if this progress towards profitability goes off track. Meanwhile, the research funding environment in the US remains a bit of a wildcard.
Finally, the price-to-sales ratio is 9, which is quite high. This makes a mockery of the idea that tech firms can’t command solid valuations in London.
Foolish takeaway
Can Oxford Nanopore stock keep motoring higher? I think it can, as long as the firm turns in a decent second half.
Therefore, long-term investors might want to consider this growth stock at 176p. But they will have to buckle up for a bumpy ride and be patient for profits.
