Co-Diagnostics (NASDAQ:CODX) stock has compelling economics if its Covid-19 tests come into use as it plans. Despite what some have written about CODX stock, the upside is still multiples of the present stock price.
Here is how I figure that. The company claims in its most recent news release that the gross margins for its Logix Smart Covid-19 tests are extremely high at 71%. It also says that it is preparing to manufacture 20 million tests “to fill existing and expected orders in the near future.”
Estimating Revenue for Co-Diagnostics
Co-Diagnostics does not list a price on its website for the tests. Barron’s estimates that such tests are worth $50 each. That is what government health plans generally pay for molecular diagnostic tests.
Let’s assume the company gives a 30% discount or greater for orders in scale. That brings the price to $35. And then there would be greater discounts due to competition. So, I suspect on average the all-in price for a large quantity may as low as $20.
With that, we can estimate the company’s projected revenue. For example, if it can sell 20 million test kits over the next two years at say $20 per test, its total revenue would be $400 million. That works out to $200 million over the next year or so.
However, I suspect it could take up to six months before that revenue actually begins accruing at the level. So, for all intents and purposes, it wouldn’t be until 2022 before the company sees the full $400 million in recurring revenue.
Is that revenue going to be growing and recurring? It is very hard to say. Will the gross margin stay at 71%? I highly doubt it. It will likely be more like 30% to 40% with the price and volume discounts.
That implies an ongoing gross margin income of $80 million on $400 million in revenue. That assumes the company continues to sell 20 million tests per year starting by next year.
Estimating the True Value for Co-Diagnostics
Let’s assume half of the $80 million in gross margin hits the net income line. That means $40 million in net income.
At today’s price for CODX stock, the market valuation around $500 million. That implies a price-earnings ratio of 13.
But it also implies a price-sales ratio of just a little over 1.25. Both of these valuations are most likely too low by a factor of two or three.
The reason is that the ongoing demand for Covid-19 tests is likely to grow over time. It will almost certainly be higher than 20 million tests per year. That is the number on which my analysis is based.
So, over the next year or so, assuming 20 million or greater tests are made and sold by Co-Diagnostics, the stock is likely to rise at least 100% to 200%. That puts the valuation at $36 to $52 per share. The market value would be $1 billion to $1.5 billion.
Should You Buy CODX Stock Based on This Valuation Estimate?
There are a lot of holes in my estimate. For one, we don’t know the effective price that the company is selling the tests.
For example, Co-Diagnostics had revenues of just $1.5 million in Q1 for “test” sales of its Logix Smart Covid-19 test kits. Its Q1 press release said it manufactured 6 million tests. The company did not say how many tests it sold.
Let’s assume it sold 5% of the 6 million tests, or 300,000. That implies that the test was priced at $5 per test. That is a long way from my assumption that the average revenue for the 20 million tests to be sold annually will be at $20 per test. On the other hand, the Barron’s article I referred to above implies the test kit could average $50 for a typical diagnostic company.
And my estimates about the margins are just that – guesses at best.
So, I advise a large amount of caution relying on my estimate for the value of CODX stock. In fact, it may only serve to show how and why the market seems to think the existing market for Co-Diagnostics is somewhat reasonable.