Shares in Covid-19 testing company Novacyt (LSE: NCYT) have pulled back recently. After rising from 14p at the start of the year to 1,275p in October (a gain of about 9,000%), Novacyt’s share price has fallen back below 800p. Clearly, investors are banking profits on the back of the vaccine news.
What I find interesting about this share price pullback is that a number of ‘insiders’ at Novacyt, including CEO Graham Mullis, have seen it as an opportunity to buy shares. This month, five directors have purchased stock. This suggests these insiders – who are likely to have an information advantage over the rest of us – expect the stock to keep rising. Insiders don’t spend their own money on company stock if they believe it’s going to go down.
Should I follow them and buy Novacyt shares myself? Let’s take a look at the investment case.
Novacyt: can the share price rebound?
Novacyt posted a R&D update last week that was quite encouraging. The company said that, in the short term, its focus is to deliver strong organic revenue growth in the core business. It believes demand for its Covid-19 testing products will continue to grow “well into 2021” as testing continues.
Meanwhile, in the medium-term, Novacyt said it expects to leverage its reputation, market intelligence, and relationships developed during the pandemic to commercialise new products. It also plans to expand its presence in respiratory and transplant clinical diagnostics, to continue to meet significant unmet market needs. Novacyt added that it continues to invest in developing its IP portfolio to enhance and secure future value. It has submitted 15 new patents covering various aspects of its Covid-19 portfolio recently.
Blockbuster revenue growth
Turning to the financials, Novacyt is likely to post some blockbuster numbers this year. In the first half of FY 2020, sales were up 900% on the same period last year, to €72.4m. The company delivered EBITDA of €49.4m for the period, versus €153,000 the year before.
Looking ahead, Novacyt advised that revenue for the second half of the year is expected to be greater than the first half. It expects full-year revenues to exceed €150m and EBITDA to top €100m. And it believes this rate of financial performance will extend into the first half of 2021.
My view on Novacyt shares
This all sounds very promising. However, I do have concerns over how sustainable the company’s revenues and profits are now that multiple coronavirus vaccines have been developed.
Covid-19 testing will no doubt be a big theme next year. It could be a theme for several years. But looking further out, to say 2025, I’m not so sure. This adds uncertainty to the investment case for me.
Personally, I prefer to invest in companies set to enjoy powerful growth for decades, not just years. I like companies benefiting from dominant structural trends, such as the growth of cloud computing and the rise of the gig economy.
For this reason, I’m going to leave Novacyt shares alone, for now. All things considered, I think there are better growth stocks to buy.
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