After a large 13x rise since the March 23 levels of last year, at the current price of around $36 per share we believe Pacific Biosciences of California stock (NASDAQ NDAQ : PACB), a biotechnology company that develops gene sequencing systems, has reached its near-term potential. PACB stock has rallied from $3 to $36, significantly outperforming the S&P which moved 70% over the same period, with the resumption of economic activities as lockdowns are gradually lifted and vaccines are being approved in multiple countries. The outperformance of PACB can be attributed to its sequencing for the coronavirus genome. PACB stock is also up a massive 420x from levels of $7 seen in early 2019, two years ago.
Most of the 13x rise of the last 2 years can be attributed to expansion of its P/S multiple. Looking at the fundamentals, the company’s total revenue grew just 0.2% between 2018 and 2020. The company’s total shares outstanding increased 17% from 135 million in 2018 to 158 million in 2020, due to share issuances, resulting in a 14% decline in revenue per share to $0.50 in 2020, compared to $0.58 in 2018. We believe the stock has rallied meaningfully and it is likely to see downside after the recent uptick. Our dashboard, ‘What Factors Drove 420% Change in Pacific Biosciences of California Stock between 2018 end and now?, has the underlying numbers.
So what’s the likely trigger and timing for downside?
Pacific Bioscience PACB s’ key product is its Sequel system, a nucleic acid sequencing platform based on Single Molecule, Real-Time Sequencing technology. The company has been focused on increasing its installed base, which currently stands at 203 (as of December 2020). 35 of the 203 systems were installed just in Q4 2020. With more systems being installed, the company can look forward to recurring consumable revenues going forward. There are other companies as well, including Illumina ILMN , that offer DNA sequencing platforms, and Pacific Biosciences faces tough competition in the market.
Pacific Biosciences recently launched its advanced version of Sequel for higher accuracy, something that will likely contribute to an increase in its installed base going forward. While the company’s revenues were actually down 13% y-o-y in 2020, the sales are expected to surge 68% to $129 million in 2021, led by an increase in total systems placements. That said, the recent stock price growth means that some of the positives are already priced in at the current price of $36. Going by the consensus revenue estimate of $129 million in 2021, PACB stock is trading at 44x its RPS of $0.82, which compares with levels of 13x and 9x seen in 2018 and 2019 respectively, implying the stock is vulnerable to downside risk.
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While PACB stock may be overvalued, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Pfizer vs Merck.