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The Novacyt share price is flying: here’s what I’d do next

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Novacyt (LSE: NCYT) shares have rocketed this year. At the start of 2020, the Novacyt share price was roughly 15p. After a phenomenal run this year, the shares are currently trading at over 1,100p.

Why is this? Well, Novacyt is a France-based diagnostics company that’s at the forefront of Covid-19 diagnostics and testing.

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It’s very quickly on its way to becoming a world leader in the field, distributing its products to over 130 countries around the world. It’s also one of the leading suppliers of Covid-19 tests to the Department of Health & Social Care in the UK.

The Novacyt share price was relatively lacklustre until Covid-19 dramatically increased demand for diagnostics and testing for the global virus this year. The World Health Organisation has consistently repeated its message to “test, test, test”. The prospects for this biotechnology mid-cap have significantly improved, in my opinion.

Rapidly rising growth

Revenue has been growing over the years, but nothing compared with this year. In the first half of 2020, revenue rose a whopping 900% to €72.4m and profit margin increased to 83% from 63%. The company was loss-making until this year. But pre-tax profit swung from a loss of €1.2m to a gain of €46.1m.

Growth is set to continue well into 2021. Novacyt has good visibility of orders and several new Covid-19 related products in the pipeline. Full-year revenues are expected to exceed €150m. Investors have started to take notice as the Novacyt share price surge shows. 

Has the Novacyt share price flown too far?

But is the share price rise overdone? Perhaps in the short term, given its rapid ascent in recent weeks. However, I’d say that the upside for this company is only just getting noticed. I’d still consider these shares as part of a balanced portfolio in a Stocks and Shares ISA. Very few brokers currently follow this stock and I wouldn’t be surprised if it gets more attention as the amount of institutional research grows.

There’s still much more to get excited about. I reckon there’s a good chance of seeing new contract wins, both in the UK and globally. The UK government scheme Operation Moonshot has begun with a trial of rapid mass testing for Covid-19 in hospitals. The plan is to also roll it out to other organisations like schools and universities.

After a tripling of the Novacyt share price in just a couple of months, the shares aren’t without risk though. If a vaccine is developed and deployed, the demand for rapid testing may potentially decline. Another risk is that a competitor develops a faster Covid-19 test.

But my view is that rapid testing is here to stay for the near future, and an effective vaccine could be some way away. Winter is coming, and Novacyt looks well-positioned to significantly benefit from increased global demand for Covid-19 testing.

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Harshil Patel owns shares in Novacyt. 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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