After a blockbuster IPO, is the Oxford Nanopore share price too expensive?

The Oxford Nanopore (LSE: ONT) share price jumped a staggering 47% after the company’s IPO yesterday, as investors rushed to buy one of the hottest IPOs of 2021.

The DNA sequencing organisation’s technology has been essential in tracking Covid-19 variants globally over the past two years. Its range of devices for DNA and RNA sequencing has also been used in monitoring the spread of Ebola and Zika in recent years. The demand for these tools is only expanding, but this isn’t the only string to the group’s bow. 

At present, the group’s tech is mainly used by universities and labs conducting scientific research. However, it’s looking to tap into the growing genomic sequencing market, estimated to be worth $5.7bn globally.

Management thinks there’s enormous potential for the technology in markets such as infectious disease, immune profiling and cancer diagnostics. Food safety and agriculture could also offer markets for Oxford Nanopore’s technology. 

With such blue-sky potential, I can see why the Oxford Nanopore share price reacted so positively at the IPO. But I want to know if there’s still room for the stock to grow from here, or has the market got ahead of itself? 

Revenue potential 

According to the company’s pre-IPO prospectus, its revenues have grown at a staggering compound annual rate of more than 50% over the past year. And it looks as if this growth’s going to continue in 2021. 

For the six months ended 30 June, the firm’s revenues hit nearly £59m, up from £48m in the prior-year period. Unfortunately, Oxford Nanopore’s still investing heavily in research and development. So, as revenues have expanded, so have operating costs. As a result, the loss before tax increased from £42m in the first six months of 2020 to £44m for the first six months of 2021. 

This makes it quite challenging for me to value the enterprise. Without any income, I can’t calculate how much the enterprise could be worth on profits alone. 

A strategy I can use to value a loss-making stock like the Oxford Nanopore share price is to use the price-to-sales (P/S) multiple. On this basis, I estimate the stock’s selling at a P/S ratio of around 56. That seems very high to me. According to my analysis, the company’s international peers are trading at multiples of 10, or less. 

That said, it’s also impossible for me to value future growth at this stage. If the company can break into new markets, then the stock could be worth the higher valuation. Especially if sales take off over the next few years.

Oxford Nanopore share price opportunity 

Considering all of the above, I think the company has enormous potential. But right now, the stock looks too pricey for me. However, it may be suitable for investors with more experience in the sector and a higher risk tolerance.