What’s the big fuss about the Oxford Nanopore share price?

A few months ago, I’d never heard of Oxford Nanopore (LSE:ONT). Yet after a successful IPO last week, the shares are now listed for unconditional trading for retail investors. From an IPO price of 425p, the Oxford Nanopore share price closed yesterday at 596p. This 40% jump at the start of life as a public company is a great boost for the business. With all the commotion going on, is this a stock that I need to put on my watchlist?

The story so far

Oxford Nanopore was formed back in 2005 and has expanded quickly since then. The business operates from Oxford, but has several other smaller offices around the world. The company was spun out of the University of Oxford, with the main focus on DNA/RNA sequencing technology.

The firm explains its operations in straightforward language. DNA and RNA make up the genetic code that defines organisms. The sequence of the code identifies the order of a particular DNA/RNA structure. So the technology that the business uses helps to identify things. Once identified, it can also help in the attributes of that element, such as whether something is safe or not.

The commercial uses for this are widespread. Healthcare is a big market, but also agriculture, security and education. In short, the potential to generate revenue from this technology is high.

From that angle, I can see why investors have rushed in, pushing the Oxford Nanopore share price higher.

Does the business make money?

A great idea is one thing, turning it into a profitable business is quite another. In the listing prospectus, it said revenue doubled from 2019 to 2020, going from £52m to £113.9m. One factor that helped here was winning government contracts to use the technology with regards to Covid-19.

However, high research and development costs meant that a loss was recorded in both 2019 and 2020. In fact, one bank covering the stock doesn’t expect the company to hit profitability until 2026.

For the moment, the Oxford Nanopore share price doesn’t seem to be affected by thoughts of immediate profits. This isn’t unusual, with other technology stocks in the past trading strongly for years, despite recording high losses. To an extent, I can see why investors would buy the stock even with it being loss-making. The potential uses and revenue streams looking forward are vast.

The main issue I have is with the valuation. In May, the last funding round as a private company was carried out. The money raised was with a valuation of £2.4bn. At the IPO, 425p gave a market capitalisation of £3.4bn. Given the 40% jump, this has now risen to £4.76bn. Has the intrinsic value really almost doubled since May? I doubt it.

My verdict on the Oxford Nanopore share price

For the moment, I won’t be investing. I think the share price has jumped on initial speculation and could settle down in the near future. Any retracement back down would be the time that I think I’d invest. I feel the fundamentals of the business are strong, but prefer to hold out for a better price. If one doesn’t appear, so be it.

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jonathansmith1 and The Motley Fool UK have 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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