Talk about coming out of the gate running! On Friday, shares in the initial public offering (IPO) of biotech company Oxford Nanopore (LSE:ONT) soared 40% on their first day of trading. That’s an incredible start to trading. Here I consider whether the Oxford Nanopore share price can keep moving upwards.
Why did the Oxford Nanopore share price soar?
A 40% increase in a share price in a single day of trading is very rare and usually suggests some special event.
The fact it happened on the first day of trading makes me think that the initial offering may have been priced too low. The organisers perhaps left some money on the table given the obviously strong demand for Oxford Nanopore shares.
However, there may also be structural reasons for Friday’s performance that may not recur. For example, Oxford Nanopore’s listing was the first, rare chance many shareholders have had to buy into a listed British biotech company. So the price action may have been driven by funds seeking to add Oxford Nanopore to their portfolios, but struggling to find sellers of the new shares without pushing their bids up.
Will Oxford Nanopore keep soaring?
If that’s the case, while there may be continued movement in the shares in the next week or two, I would expect that we have already seen most of the action. Friday was clearly a busy day as investors tried to find Oxford Nanopore shares for their portfolios. Now that many have done so, I don’t expect to see the same manic demand.
That doesn’t mean that the Oxford Nanopore share price won’t keep rising. It may do. But in future, it is more likely to be based on investors’ outlook on the company’s fundamental prospects, not just the realignment between pent-up supply and demand we saw on Friday. That can cut both ways. Friday’s rise means that the consistently loss-making company now has a multi-billion pound valuation. With lofty performance expectations reflected in that price, any future underperformance could hurt the Oxford Nanopore share price badly.
Why I’m not buying Oxford Nanopore shares
The company’s nanopore-based sequencing platforms, enabling immediate DNA and RNA sequencing, has clear appeal after the pandemic brought home the implications of such sequencing. That helps explain why Oxford Nanopore’s revenues more than doubled last year, to £114m.
But sales growth is often easier than profit growth. For now, the company’s operations remain deeply in the red. Last year’s loss, although reduced, was still £61m. That’s a lot of money. If losses continue, liquidity will be a risk at the company. But there are other risks, notably competition. The rush for Oxford Nanopore shares partly reflects investor thirst for exposure to sequencing. That has led to a crowded field already, including giants such as Illumina. Such competition risks any future prospect of profitability for a company like Oxford Nanopore.
If it keeps growing revenues at the current clip and becomes profitable, I do think the Oxford Nanopore share price could keep rising. That is in the future. Even the IPO prospectus warned, “The Group may never achieve profitability“. With its loss-making history, lofty valuation, and erratic share price behaviour since flotation, I won’t be adding Oxford Nanopore to my portfolio.