If you took all the stocks in the world and put them in a single basket, about 58% of that combined market cap would be U.S. stocks. If you want to look that number up, just download a fact sheet for the MSCI ACWI IMI Index. All those cryptic acronyms mean that the index includes stocks of all sizes, for all countries that have stocks. In second place is Japan, with about 6.3% of the world’s stocks by market cap, followed by the U.K. at 3.9%.
For anyone with an Interactive Brokers account, the world is your oyster. Stocks that trade on any global exchange are accessible, and by holding them you’re diversifying your portfolio in numerous ways. It’s something we touched on in our recent piece on how to Protect Your Portfolio When the U.S. Dollar Collapses. Today, we’re going to talk about a popular life sciences company – Oxford Nanopore Technologies – that’s decided to have their initial public offering (IPO) on the London Stock Exchange (LSE).
(All below numbers are in USD unless otherwise stated.)
About Oxford Nanopore Stock
Founded in 2005, and unsurprisingly from a lovely part of the United Kingdom known as Oxfordshire, Oxford Nanopore Technologies has raised around $1.376 billion in funding from a plethora of investors including Invesco, IP Group, Amgen, Nikon, and Illumina. The last time we looked at the company was several years back in a piece titled Oxford Nanopore Sequencing vs. Illumina. At that time, analysts were claiming that Oxford Nanopore was overvalued at a valuation of $1.55 billion, and that an exit seemed unlikely at that valuation. Today, the company is valued at $3.47 billion and looking to do an IPO on the LSE which allows us to see the inner workings of a company that says their long-read genetic sequencing technology will lead us to a world where every living thing is quantified precisely and completely – the Internet of Living Things.
Our goal is to enable the analysis of anything, by anyone, anywhere.
Oxford Nanopore Technologies
Not All Revenues Are Created Equal
We’ve been carefully avoiding any investment thesis that relies on The Rona because it’s a space that’s just far too volatile. Today’s modern test could be tomorrow’s obsolete test, or today’s most effective vaccine might be tomorrow’s most flawed. There are far too many uncertainties, too much global regulatory complexity to consider. That’s why when a company does the pandemic pivot, we question if that detracts from focusing on their core product offering. Just look at how Oxford Nanopore has benefited from COVID testing.
The IPO filing document talks about how in 2020, the UK Department of Health and Social Care (DHSC) engaged Oxford Nanopore for “the one-time purchase of certain SARS-CoV-2 COVID-19 test kits.” Said purchase accounted for 42% of 2020 revenues, or the entirety of all testing revenues Oxford Nanopore received. (During the same period, 92% of the Group’s life science research tools revenue was generated from sales to customers located outside the UK.) A closer at the COVID testing revenues shows us they are largely just a distraction.
Oxford Nanopore’s COVID Tests
Oxford Nanopore’s COVID testing segment consists of two parts:
- Sourcing PCR tests from third-party suppliers and reselling them to the UK government.
- The LamPORE Assay – the company’s first Europe approved test developed and commercialized in 2020 to detect COVID 19
The first bullet point is rubbish. We want to invest in a company that’s developing leading-edge genetic sequencing equipment, not a PCR test reseller. The second bullet may seem promising, but the aforementioned customer concentration risk came around and bit them in the ass. The filing states:
In April 2021, the DHSC determined it no longer had a requirement for LamPORE and sent a notice purporting to terminate its contract with the Group early before taking the maximum quantity allowable under the contract.
As a result, Oxford Nanopore’s 2021 revenues are expected to be materially impacted. So, that whole COVID testing thing is a big nothing sandwich.
Life Science Research Tools
Now we can redo the revenue chart to show what matters – revenues from Life Science Research Tools (LSRT) – and we’ll also include the results for the first half of 2021 (LSRT revenues only, of which 66% came from consumables):
This is looking a whole lot better, especially when you consider that during the second half of the year, Oxford Nanopore realizes more revenue than the first half. (Historically it’s about 40% first half, 60% second half.) That being said, we’re given guidance that says “The Group is targeting LSRT revenue growth of 30-40% in FY21” which would equate to about $117 million for 2021 on the lower end of that guidance range.
In their recent announcement to float, Oxford Nanopore also provided guidance looking forward to 2023. We extrapolated the below chart using the lower range of their cryptic guidance which skips 2022 for whatever reason.
That’s what revenue growth ought to look like. This isn’t some crummy SPAC pulling numbers out of their ass, this is a proper company where what management says reflects what they actually think they can do (otherwise the analysts will punish them for not meeting expectations). Speaking of which, here’s what valuation the analysts believe Oxford Nanopore will IPO at:
Analysts at Jefferies estimated a valuation of £4bn based on Oxford Nanopore’s 2023 revenue targets and in comparison to its closest publicly listed rival, the $6bn US company Pacific Biosciences.
Credit: The Financial Times
Now that we have some reference point for valuation, let’s see how these two genetic sequencing companies stack up using our simple valuation ratio (we’ve thrown in Illumina too for good measure).
|Company Name||Market Cap||Revenue Data Point||Annualized Revenues||Ratio|
Any company with a ratio greater than 40 is too rich for our blood, no matter how great the story is. But if Oxford Nanopore shares end up being priced with a ratio under 40, should you buy the stock?
Should You Buy Oxford Nanopore?
We have no idea. We’re not your mum. But we can talk about whether or not we’d consider adding Oxford Nanopore to our portfolio of 33 disruptive tech stocks.
The bull thesis is that long-read sequencing is the way forward. While Oxford Nanopore’s machines are more expensive and less accurate than Illumina’s technology, (so sayeth the FT), analysts are predicting the price gap will close. Accuracy is already being improved significantly over time:
The Group has been able to improve Raw-Read Accuracy from around 80% in 2014, to 92% in 2019, and to 99.8% in May 2021 using the latest algorithms and chemistries.
Credit: Oxford Nanopore
Disruptive tech investment firm ARK Invest believes in the future of long-read sequencing, and they’ve made a play for Pacific Biosciences (PACB), a company that seems to be the only formidable competitor that Oxford Nanopore has at the moment. According to the filing document, PacBio “requires the complexity of synthesis as part of their sequencing process,” while Oxford Nanopore “sequences the native strand of DNA/RNA directly, enabling the delivery of rich biological data such as epigenetics.” We have no idea what that means either, but we’re certain that PacBio disagrees with that statement. It’s something we looked at in a piece titled Bionano Genomics Stock on Offer in IPO.
Pacific Biosciences vs. Oxford Nanopore
Let’s assume that playing the long-read sequencing thesis requires an investment in PacBio and/or Oxford Nanopore. (Bionano Genomics (BNGO) was suspiciously absent from Oxford Nanopore’s list of competitors which tells you something.) We always invest in market leaders if possible, so which company will come out ahead? There’s enough room for multiple providers of long-read sequencing technology, so there doesn’t have to be a single winner. Since we won’t have anything concrete on valuations until the IPO happens, we’ll leave you with this thought.
Earlier this year, we coined a piece titled Why is Pacific Biosciences Stock Dropping? At that time, shares of PacBio were trading at an all-time high and we correctly predicted they’d fall, -35% to be exact based on today’s prices. (A magic eight-ball, purchased from a Romanian fortune teller in the depths of the Hoia Baciu forest, helps put us in the 5% of active money managers that can beat the market over the long term.) Based on the first two quarters of 2021, it appears PacBio may be back on track with that revenue growth – $60 million for the first half of 2021. If they can keep that up, they’ll clear $120 million in revenues for the full year. That’s the growth we’re looking for, but there’s one other thing to consider here – the ARK Effect.
What caused PacBio to be so overpriced in the first place was arguably the ARK effect. Since ARK has historically preferred to stick with U.S. stocks, it seems unlikely they’d dabble in a stock that trades on the LSE. On top of that, companies that trade on the LSE usually enjoy a meaningful discount to those that trade in the States. (Just look at what’s happening right now with Blue Prism – activist investors saying a 100% premium on current share price would still undervalue the company, echoing what Blue Prism’s CEO already said.)
We’re keen to see what valuation Oxford Nanopore comes out of the gates at. One option could be to open a position funded with some trimmings from our large Illumina position. Whatever we decide to do, Nanalyze Premium annual subscribers will be the first to know.
What’s not to like about a company selling tomorrow life sciences research tools with a majority of revenues currently coming from consumables? Possibly the valuation, for one. Until Oxford Nanopore shares begin trading, we’ll have no idea if this is a company that can find a home in our portfolio. With just two companies vying for the lead in long-read sequencing – Pacific Biosciences and Oxford Nanopore – it’s a pretty straightforward decision to make once we have some clarity around comparative valuations.
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