In the past year, Co-Diagnostics (NASDAQ:CODX) has gained more than 1,870%, as investors hone in on biotech companies that can help in the fight against the novel coronavirus. Unfortunately, this attitude has also led to several companies becoming overvalued, and I believe CODX stock is one such firm.
CODX is excellent for day trading but is unsuitable to hold for a more extended period. Its operating metrics are nothing to write home about — the company is merely riding general market enthusiasm for biotech stocks in the current climate.
I am expecting dramatic upswing and sharp downturns with CODX stock for the next few months until the market leaders for Covid-19 emerge. However, I don’t think that shares of the company offer any long-term value.
Q1 Earnings Report and CODX Stock
Co-Diagnostics is a molecular diagnostics company that manufactures molecular tools for the detection of infectious diseases. The core description of the company’s operations is enough to pique any investor’s interest in the current climate. But its operating metrics underline its weakness, laying out a grave warning for all potential stockholders.
In the recently-completed quarter, EPS came in at a negative $0.05 per share, missing analysts by $0.01. Revenue was also an unimpressive $1.55 million, so it doesn’t look like the company sold a lot of its Logix Smart COVID-19 test kits this quarter. In addition, selling general and administrative expenses and R&D costs ballooned in the quarter, resulting in a substantial operating loss.
However, year to date sales are more than $18 million, with $16.5 million in the second quarter alone. I believe profitability will increase in the short-run due to the astronomical increase in sales. Still, only time will tell how government regulation and competition will eat away at profits and margins.
What Does the Future Hold for CODX?
A major reason for the rise in CODX share prices is the projected sales for 2020. Analysts expect revenue to hit $93.45 million, a year-over-year increase of 43,371.18%.
However, revenues are expected to increase by just 6.62% in 2021. And can you blame them? Most experts believe the demand for tests will subside with each passing day, as we inch closer to a Covid-19 vaccine.
In addition, there are 32 testing kits approved by the U.S. Food and Drug Administration that are commercially available at the moment.
In the coming months, we may see several more companies enter the market, so its hardly surprising that analysts don’t believe revenues will keep rising at an exponential rate. Refinitiv data has a 12-month price target of $33.70 per share — an upside of 116.4%.
For a stock that has gained so much ground in one year, it isn’t an aggressive estimate at all. But considering the fluidity of the situation, I expect a lot of peaks and valleys along the way.
As is the case with most biotech companies at the moment, share prices are highly sensitive to positive or negative news, making the stock incredibly risky. If a competitor does well, it could lead to a drop in CODX stock price and vice versa. In many ways, it isn’t as much as what Co-Diagnostics is doing that is affecting share price, as is the overall industry perception.
Final Word on CODX Stock
On a trailing 12 months basis, CODX stock trades at an EV/sales ratio of 233.02 times. That’s too expensive, in my opinion, considering the company’s history. I expect the stock price to decline as we move further along in the year.
The company doesn’t have an account of generating stable returns or revenues, and I don’t believe that will change. The pandemic has provided tailwinds that will start to weaken in the coming quarters. Investors that are looking at the stock as a long-term investment will be disappointed once revenues begin to dissipate, and valuations return to earth.
However, that’s not to say that you can’t make money off the stock in the interim if you have the discipline to know when to exit your position. But I would only play with the money I have to lose with this one.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. He has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio. Faizan does not directly own the securities mentioned above.