As I write this, Sorrento Therapeutics (NASDAQ:SRNE) is trading a few pennies under $8, higher than it’s been since October. While it’s possible SRNE stock will gradually make its way back to its 52-week high of $19.39, a level it hit in August, the odds are more likely that it will revisit prices below $6.
In mid-November, I suggested that despite the risk, Sorrento’s share price had fallen enough to justify a nibble from speculative investors.
“[F]or that small sliver of speculative investors out there, the fact that it has lost 50% of its value over the past month points to a risk-to-reward proposition that has once again has become favorable,” I wrote on Nov. 13.
“I’m not suggesting Henry Ji [Sorrento’s chief executive officer] will become a billionaire anytime soon, but if you want to bet a bob or two on SRNE and can afford to lose it all, the $6 area is an excellent entry point.”
Up 23% over the past three weeks, I would be cautious about buying its stock at $8 or more. At least not until the company reveals some concrete evidence that it’s making real progress at being part of the Covid-19 solution.
If you didn’t buy when its share price was trading in the $6s, I would wait for another opportunity at some point in the next 3-6 months,
The Odds of Success Are Diminishing
In my November article, I quoted InvestorPlace contributor Josh Enomoto, who believes that the company might end up empty-handed despite having several different solutions across the Covid-19 spectrum.
“Yes, it has something for everything as far as Covid is concerned. But none of these platforms are exclusive to Sorrento and Sorrento leads in none of its contested market subsegments,” said Enomoto.
Fast-forward a couple of weeks, and my colleague continues to argue that the potential opportunity for Sorrento is quickly narrowing. At some point, it’s bound to close entirely, leaving SRNE shareholders on the outside looking in.
Josh mentions no less than six things that must happen for Sorrento to get to the front of the line when it comes to Covid-19. In particular, three suggest just how long the odds are for SRNE to be in the winner’s circle.
“Both the RNA vaccines underlining Pfizer (NYSE:PFE) and Moderna (NASDAQ:MRNA) must fail. AstraZeneca (NASDAQ:AZN) must also trip up with its viral-vector vaccine, which may offer the crucial logistical advantage of a one-dose regimen,” Enomoto wrote on Nov. 30.
“Then, Novavax (NASDAQ:NVAX), which utilizes a similar subunit approach with Sorrento, must stumble before crossing the finish line.”
Of those four, only AstraZeneca seems like it could falter down the stretch — while it’s said it should have the results from its U.S. Covid-19 trial by late July, it might need 1.5 doses to be 90% effective — and even it looks like it will have some part to play in getting the world inoculated against the novel coronavirus.
The Bottom Line on SRNE Stock
Because the odds of a home run by Sorrento at this point are limited, and it’s unlikely to have anything but a small part to play in getting the world back to normal, it makes sense to have a greater margin of safety.
InvestorPlace’s Mark Hake recently discussed how Sorrento is burning through cash at an alarming rate.
“[I]n the first nine months of 2020, Sorrento generated CFFO [Cash flow from operations] of negative $118.67 million. This can be seen on page 8 of its Q3 quarterly 10-Q filing,” Hake wrote on Nov. 30.
“On top of that, it wasted another $28 million on capex, licenses, and other items that it couldn’t afford. That works out to an average of almost $49 million in cash burn each quarter.”
Essentially, my colleague’s arguing that the company’s ongoing need to issue more shares is diluting existing shareholders without delivering any news that is commensurate in value to justify the dilution.
So, unless it comes up with a blockbuster in the near term, Sorrento’s share price is likely to move lower to reflect a valuation that’s equal to or lower than its current market capitalization of $2.1 billion.
If you bought in the $6s, I’d either sell for a profit at this point or wait for it to fall back into the $6s to buy some more. Under no circumstances should you consider its stock over $8 a share.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.