The Avacta (LSE: AVCT) share price has climbed in value since the beginning of 2021. Shares in the firm are up 56% year-to-date and 560% over the past 12 months. The stock has added to this performance in early deals today, rising by more than 25%.
However, past performance should never be used as an indicator of future potential. So with that in mind, I’m going to take a closer look at the business to establish if the Avacta share price is an interactive investment at current levels, or if the market has become overexcited.
Avacta is one of the handful of public businesses developing new tests and treatments to help the UK’s fight against coronavirus. The company has been developing a rapid test to detect Covid-19. Today, announced it had received initial data for its SARS-CoV-2 rapid antigen test from ongoing studies in Europe and the UK.
According to the company’s press release, the results showed “excellent performance of the test in identifying patients with an infectious viral load and no false positive results.“
This update is incredibly positive for the group. However, it’s worth noting that these results were achieved with a relatively small sample. The company claimed a “clinical sensitivity of 96.7%” from just 30 positive samples in its statement. Some 26 samples were identified as negative.
The organisation is now seeking a full clinical validation with a larger number of patient samples. It aims to bring the test to market in Europe around the end of the first quarter of this year.
Based on the above, it seems to me as if the Avacta share price may have gotten ahead of itself. Even in the most optimistic scenario, analysts are forecasting less than £8m of revenues for the business in 2021. That compares to its current market capitalisation of £400m.
If the testing product doesn’t achieve full clinical validation in the next few months, these projections may turn out to be far too optimistic. In this worst-case scenario, the stock looks incredibly overvalued at current levels.
Avacta share price potential
Still, there’s no denying the company’s potential is tremendous. The government has stated rapid testing will be essential to unlocking the UK economy. And it’s not just the UK market where the demand for testing products is growing. All over the world countries are trying to control the coronavirus, and testing programmes are the most efficient way of achieving this aim.
Overall, the Avacta share price has performed well over the past 12 months. Unfortunately, it’s impossible to say if it will continue to do so as we advance. There’s already a lot of optimism baked into the firm’s valuation at current levels, and it’s unclear if the business can meet market expectations. As such, I’m not a buyer of the stock today.
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Rupert Hargreaves 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.