The Omega Diagnostics (LSE:ODX) share price has been moving like a rollercoaster recently. After surging by more than 300% in 2020, the stock has continued to climb. But recently, it’s started slumping. What’s going on? And is this a buying opportunity for my portfolio? Let’s take a look.
The volatile ODX share price
I’ve previously explored Omega Diagnostics. But as a quick reminder, the company offers products to detect food intolerances, allergies, and viral infections. At the start of the pandemic, the management team decided to utilise the firm’s technology to quickly develop antibody tests for Covid-19.
In retrospect, this pivot proved to be a wise decision. Why? Because it subsequently led to a signed contract with the UK Department of Health and Social Care that could be worth up to £374m.
Under the agreement, Omega Diagnostics will be using its manufacturing capacity to produce up to two million lateral flow tests per week by the end of this month. And based on its most recent update, it’s on track to achieve this goal.
Given that the firm’s pre-pandemic revenue was around £9.8m, this contract is undoubtedly a major opportunity. So I’m not surprised by the explosive growth of the ODX share price last year. But there seems to be some growing uncertainty among investors about the company’s future potential, those worries causing the recent decline.
Looking to the future
As promising as the most recent update is, the company still has a vast array of challenges that lie ahead. While the Covid-19 contract may be game-changing, there is no guarantee that Omega Diagnostics will receive the full amount. After all, with the number of vaccinations increasing relatively quickly, the demand for these tests is falling.
Even if Omega Diagnostics can extract the maximum value from this contract, the source of revenue is ultimately unsustainable. So the question is, how will it generate future sales? The firm does have an existing portfolio of other products that have been generating income for many years. But not on the same scale.
The surge in cash flow from this contract will likely provide the business with additional capital to further expand its portfolio of offerings. However, the medical industry is one of the most regulated in the world. And therefore, bringing new products to market may take a long time. Suppose it cannot maintain the level of sales that investors are now expecting. In that case, I think it’s likely that the ODX share price will continue its downward trajectory, over the short term anyway.
The bottom line
Omega Diagnostics looks like a healthy and robust business in my eyes. But even after the recent tumble in the ODX share price, the valuation still seems propped up by investor expectations that may not come to pass. And so, for now, I’m keeping it on my watch list.