Novavax shares are overvalued
Now I want to warn those who are still planning to buy Novavax shares: there is a high probability that the share price is already greatly overestimated. If since January you still hold the securities of this company in your portfolio, then it’s time to think about taking profit, because the price has already increased to an unimaginable size. In January, at the time of this writing, the company’s shares were trading at USD 8.50, now their value reaches USD 100 per share. That is, 1,000 shares bought at USD 8.50 in January would currently be generating a profit of about USD 90,000, while buying such a volume of shares would only take USD 8,500.
Why has the value of Novavax shares increased?
Novavax has never generated profit, that is, it has always been unprofitable. She has only two drugs that are in phase 3 testing and may soon be on sale. It is these drugs that will generate the company’s future profits. But the main stake is on the NVX-CoV2373 vaccine against the Covid-19 coronavirus, which is now only in the first phase of testing and will be able to go on sale, at best, next year. However, it was this vaccine that attracted the attention of investors and provoked such an increase in the value of securities.
What explains the behavior of investors?
The behavior of investors in this situation can be easily explained. They buy shares in companies that have a prospect of making a profit in the future.
An example with companies producing electric vehicles
The same thing once happened with Tesla stock. The company has been unprofitable for 6 years, but its securities have risen in price every month. Now, for example, the shares of almost all companies that are engaged in electric vehicles are growing in value, while none of them has yet sold a single vehicle, and besides, all of them, except Tesla, are unprofitable. Below you can take a look at the charts of these companies.
Investment risks in biopharmaceutical companies
By comparison, investing in EV companies is less risky than investing in biopharmaceutical companies. Electric vehicles are the future, there is a demand for them, and this sector will inevitably develop. And those who are already on the market will be the first to profit. Investing in biopharmaceutical companies is a very risky business. It all depends on the FDA’s decision. A drug can go through 3 phases of testing, and then not get approval at the final stage, and as a result, there is a complete failure. Investors are selling off shares, and companies are trying to survive with loans and new sources of funding. The same thing once happened with Novavax.
Failure of Novavax in the 3rd phase of testing – 2016
In 2015, the share price reached 282 USD per share. ResVax was in its third phase of testing, investors had faith in the company, and it was easy to raise millions of dollars in research funding. But in 2016, the drug ResVax was not tested, or rather, the dosage that was used in testing was ineffective. As a result, in one day the share price fell by 85%, and the company had to lay off more than 30% of its staff in order to cut costs.
Another failure of Novavax at the 3rd phase of testing – 2019
Novavax continued to work and in 2018 received a grant of $ 89 million from the Bill & Melinda Gates Foundation to research and test the ResVax vaccine – RSV F Vaccine , which is used to protect children (by vaccinating a pregnant mother) from respiratory diseases in the first months of life. That is, the drug, testing of which failed in 2016, is now being tested on two groups of people. The first is pregnant women and the second is the elderly over the age of 65. In this case, the likelihood that one of them will pass the test increases. The news reassured investors and the stock quickly skyrocketed from USD 20 to USD 50. However, in 2019, Novavax faced another failure. Testing did not give positive results, and the shares fell in price from 50 to 4 USD per share. It would seem that this is all. So many years of work, millions of dollars spent on research, it was all a waste of time. But actually no. During this time, employees have accumulated tremendous experience, which they continue to apply in their new research. And it was this experience that interested investors, who believed that the company’s employees would be able to develop a vaccine against Covid-19.
A month later, Novavax receives a $ 4 million grant from the Coalition for Epidemic Preparedness Innovation (CEPI), and shares continue to rise. That is, they just started pouring money into the company, and the process started. Investors turned their eyes to Novavax shares again and started buying them. In May, the amount of investments from CEPI increased to 388 million USD. The share price on this news exceeded 50 USD. June is coming and Novavax receives another USD 1.6 billion grant from the US government. This is exactly the event that should have become the main driver of growth in the value of shares. After this news, the price of shares soared from 50 to 100 USD per share.
Risks of investing in Novavax shares
Now let’s go down from heaven to earth. Novavax is currently testing 9 drugs, and none of them is profitable yet. A Covid-19 vaccine called NVX-CoV2373 is only in its first phase of testing. And we know that in the past, drugs were eliminated that even reached the 3rd phase. That is, the probability of failure at the moment is very high. Further, the shares already cost 100 USD, while in January their price did not exceed 10 USD. That is, the current price is no longer so attractive for investment. The growth in the value of shares is directly related to the grants that the company received, and at the moment it is still unprofitable. And finally, history shows us that when stocks are trading high, then closing the deal in case of failure with a small loss will not work. Even before the market opens, the price of a security falls by tens of percent, leaving no chance to close a position with a minimal loss.
We do not deny further growth in the value of Novavax shares. But from a trader’s point of view, current prices are too risky to buy. I believe in this company and that they are capable of developing a vaccine, and I am ready to buy its shares again, but only at lower prices. The greed of investors, of course, can lead to even greater price increases, but all this will not fit into the usual market behavior. An imbalance between supply and demand may sharply occur, which will ultimately lead to very high volatility, which is dangerous for inexperienced traders and which in a matter of minutes can lead to the loss of a large amount on the deposit. But the most frightening thing is the upcoming testing results: if they turn out to be unsatisfactory, then the stock will fall back to its lows, at which it was back in January. Therefore, the ratio of risk to reward is not attractive here. Now there is the potential to earn 100% of the invested funds, but 80% of the same amount must be put at risk. In January, the profit potential was very high, and since the stock was trading at lows, the risk did not even reach 50%.