The Covid-19 pandemic has wrought havoc in the stock market, and most UK shares have tumbled in price. But some, like Novacyt (LSE: NCYT) have done just the opposite. The Novacyt share price today stands more than 20 times higher than it was at the beginning of the year.
It has been a lot higher, though. I’ve you were lucky enough to sell at the peak in mid-April, you could have pocketed a 38-bagger. Those who bought at the peak are now 40% down on their investment. Growth share prices often fall back a bit from their early peaks due to profit-taking before continuing up. So is the current dip a buying opportunity?
The soaring ride of the Novacyt share price has all been down to demand for its Covid-19 tests. On Tuesday, the company gave us an update “on its polymerase chain reaction (PCR) test for COVID-19, developed by Primerdesign, the Company’s molecular diagnostics division“.
Sales are booming in 2020
By 1 June, sales of the test had reached €45m (£40m), with orders and contracts for delivery adding a further €90m (£80m). That takes total sales and confirmed orders to €135m (£120m). Considering that the firm’s consolidated revenue for the whole of 2019 came to £11.5m, the reason for the huge surge in the Novacyt share price is clear.
Although 2019 brought home only modest adjusted EBITDA of €0.2m, the company was making steady progress. The year was the company’s third consecutive one with positive EBITDA. And Novacyt suggested it could have been better had it not faced working capital constraints. Well, with the cash that’s rolling in this year, I think working capital constraints should be a thing of the past.
Does the Novacyt share price reflect the long term?
Though Novacyt is looking a lot more like a viable prospect now, there’s a big question in my mind. Does the Novacyt share price genuinely reflect the company’s long-term prospects? Let’s look further at the latest update. The Primerdesign test is now being sold in more than 130 countries, and the UK and Germany are the biggest customers. Entry into the US market seems uncertain at this point, but the firm says it is “pleased with the progress it is making“.
The French government has not approved the test, which is a bit of a setback, and the Novacyt share price fell on the news. As I write, it’s 7% down on the day.
Sales could keep on soaring
This is generally all very impressive, but I see one huge potential downside. Sales of Novacyt’s coronavirus test could well explode in the coming months, as countries move from lockdown to mass testing. But how many tests will Novacyt sell next year? In 2022 and beyond?
If someone develops an effective vaccine, that number could plunge to zero. And if that happens, the Novacyt share price will need to be valued on the rest of the company’s products.
I see Novacyt as a potentially great long-term investment, and the company should certainly get an enormous boost from its Covid-19 test. But I’ll wait and see what the Novacyt share price looks like when the pandemic is behind us.
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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.