Sorrento Therapeutics (NASDAQ:SRNE) stock has been on a rollercoaster ride this year. SRNE stock was trading for as little as $1.55 per share earlier in 2020, but then spiked to a high of $19.39 following purported advances in its research on the novel coronavirus.
Since then, however, Sorrento’s promising findings haven’t translated to much in the way of approved drugs/vaccines or commercial revenues. As a result, Sorrento has slipped to around $7.60 per share now. It remains a hot trading stock, however, with millions of shares exchanging hands every day. It’s also a short-seller favorite, with about 31% of the float being shorted as of this writing. That means that Sorrento has at least one more big move coming up soon as this trading battle plays out. So, who will have the upper hand in SRNE stock going forward?
Lots of Claims, Progress Less Certain
Earlier this year, Sorrento’s Chief Executive Officer (CEO) Henry Ji claimed that the company had made a huge breakthrough against Covid-19. In fact, Ji suggested that Sorrento had come up with a way to inhibit the virus 100%. However, credible sources including the Wall Street Journal warned that the company was presumptive in making such a bold statement.
And, indeed, many months have passed since Sorrento made its 100% statement, and there’s still nothing ready for market quite yet. In fact, much of Sorrento’s work so far has focused on pre-clinical or Phase 1 trials, which is a long way away from anything that could be ready to receive Food and Drug Administration (FDA) approval. Sorrento has created a whole bunch of interesting Covid-19 product candidates, but it hasn’t advanced any of them far enough to put the finish line in sight.
Hence the mounting skepticism by the market in general and short sellers in particular. Large pharma companies haven’t launched a zillion different potential products to deal with Covid-19; rather, they’ve tended to pick a couple of promising things and develop them rapidly.
The Valuation Doesn’t Make Sense
Sorrento has a market capitalization of $2 billion, give or take a little depending on the day. Yet, last quarter, Sorrento generated just $12 million in revenues. Notably, most of those revenues came from a product unrelated to Covid-19. It wasn’t just one bad quarter either. Over the past 12 months, Sorrento has brought in about $42 million in revenue while losing around $290 million overall. That’s a dreadful ratio.
More bluntly, Sorrento’s Covid-19 portfolio of products simply hasn’t translated to profits yet. And given the speed with which rivals are developing successful, approved vaccines and therapeutics, it’s increasingly unclear what Sorrento will bring to the table if it finally ends up getting something approved in 2021 or beyond.
All of that leads me to agree with fellow InvestorPlace contributor Faizan Farooque: There’s simply no upside in SRNE stock, as rivals have developed their Covid-19 product pipelines more quickly. As Farooque concludes, this is a day trader’s stock now, as there’s little fundamentally to back up the story. That said, for traders, there is one major hope left: short-sellers.
Shorts Circle SRNE Stock
Sorrento has been a popular stock with short sellers for awhile. Notable outfit Hindenburg Research went after Sorrento several times this spring and summer. For example, Hindenburg claimed that the intellectual property for Sorrento’s spit test for Covid-19 cost only $5 million and thus wasn’t credible. Hindenburg suggested that SRNE stock was up primarily on television-driven hype rather than strong fundamentals.
The company shot back at Hindenburg, offering a different explanation for those details. However, it seems Hindenburg has been more persuasive. Not only has Sorrento’s stock price slumped, short sellers remain highly engaged in the trade. Currently, more than 30% of the company’s float — amounting to half a billion dollar’s worth of SRNE stock — is sold short. This sets off the potential for a major squeeze if Sorrento announces meaningful progress on any of its numerous products for Covid-19.
Sorrento’s Bottom Line
The best reason to own SRNE stock at this point is the huge short interest. That, in and of itself, is something of a paradox. Normally, you’d prefer there to be a strong fundamental case to own a stock. Sadly, on that front, there’s little to recommend Sorrento.
The company has a long track record of poor business performance, and there’s little evidence that 2020 has changed much on that front. The company has a ton of irons in the fire for Covid-19, but there’s not much reason to think any of the individual products are going to end up being a major commercial success.
However, as a trader’s instrument, Sorrento is fascinating due to the 31% short interest. I certainly would be cautious betting against the stock here. Ultimately, SRNE stock is likely to crash once Covid-19 is behind us, and the company remains unprofitable. In the near term, however, in a buoyant market like this one, anything could happen. For investors, however, Sorrento remains an easy avoid.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.
