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Is the Novacyt share price too high? Here’s what you need to know

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Novacyt (LSE:NCYT) have been one of the few companies that has actually benefitted during 2020. Coronavirus has provided them with lucrative contracts for providing vital testing kits to the UK government. It’s no wonder that Novacyt shares have risen from 12p in 2019 to over 380p. At one point, the shares hit nearly 500p! And the Novacyt share price is moving up again after releasing a positive trading update this morning.

The results are in

The company has just released its H1 (first two quarters) results, announcing a pre-tax profit of €40.2m in the six months to 30 June, compared with a loss of €2m a year ago. Revenues were also up 900%. Not bad at all! EBITDA also rose – from €0.2m (2019 H1) to just under €50m. Directors believe demand will grow until “at least the first half of 2021” under the tense conditions presented by Covid-19.

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The massive demand for PCR testing kits has of course been the main driver for these results and the rapid advancing of the Novacyt share price. And the company is looking to build upon its success. A new avenue is currently being explored in the launch of a diagnostic test designed to tell the difference between Covid-19 and the flu. This is well-timed, coinciding with the approaching winter flu season. So, the company is looking to the future. But what about the shares?

Is the Novacyt share price too high?

Full-year revenues are expected to exceed €150m and EBITDA to exceed €100m. For a company with a market cap of £280m, that’s a pretty strong performance if the guidance does play out as expected. But we must remember that 2020 has been an exceptional year and a very fortunate one for Novacyt. In 2019, the company recorded a net loss of £6.5m. In fact, 2020 will be the first year that will show any profits. If the Covid-19 threat dwindles (and that’s a big if), will Novacyt be able to sustain this year’s profitability?

Investors are always looking to the future. Part of the current price of a stock is always a judgement of the company’s future performance. The Novacyt share price is no different. The only way the stock can keep rising is by finding new avenues for profitability – especially in a post-Covid age. One hope is that the global contacts and networks that will be created during the pandemic will provide access to wider markets for other products in the future. The firm has repaid all its outstanding debts as well investing heavily in its inventory. Despite this, it was still left with €19.7m in cash flow as of 30 June.

It’s certainly possible that Novacyt could grow over the next few years into a profitable business that would justify the massive recent share price growth. At the same time, it’s also possible that 2020–21 was a brief period of fortune and the days of profit will disappear as quickly as they arrived. At this stage, in my opinion, you have probably missed the bargain that early 2020 provided.  

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Toby Aston has no position in any of the share 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.

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