Organovo (NYSEMKT:ONVO) has gained tremendous attention in the market over the past year. The stock began 2013 at below $3.00 but recently rose as high at $13.65. In October, the stock was trading around $5.50, but then suddenly took off as media interest in the stock suddenly picked up.
During this time news was minimal. Organovo announced the following:
"Building on data first presented at the Experimental Biology conference in April 2013, the company presented data demonstrating retention of key liver functions in bioprinted tissues for up to 40 days, longer than one month. Additional data presented at the Cell Therapy Bioprocessing Conference demonstrated that Organovo's 3D liver tissues exhibit dose-dependent responses to acetaminophen, a known liver toxicant, and that the toxic effects can be assessed using both standard screening assays and histopathological assessment of the treated tissue. The data demonstrate that Organovo's 3D Liver tissue can potentially have value in assessing toxicology problems in human liver over a long period, including sub-acute and multiple dose effects."
The company also announced that it was on track to launch its 3D liver assays as expected in 2014.
Essentially, the October announcements by Organovo simply told us that everything was proceeding as had been previously announced. There wasn't really much reason for the stock to go parabolic and the stock stayed at around $6.50.
But media attention quickly picked up. Despite the fact that it is not really a true comp for 3D printing plays such as 3D Systems (NYSE:DDD), Stratysys (NASDAQ:SSYS) and ExOne (NASDAQ:XONE), Organovo managed to mimic some of the spectacular gains that these stocks logged during the past few weeks. Many media contributors continue to mistakenly lump Organovo in with the 3D players.
A string of over 20 articles quickly hit the tape discussing Organovo's potentially transformational role in areas such as synthetic meat that could transform the multi billion dollar food industry. Following that, there were days when as many as four articles per day came out telling us that the future was compelling for Organovo.
Organovo booked just $23,000 in revenue last quarter. The company has given no guidance as to expected near future sales following the launch of its 3D liver assay in late 2014. The company does have over $50 million in cash, but this equates to under 70 cents per share, weak downside protection against a share price of nearly $10.00.
We simply have absolutely no idea how Organovo will perform over the next few years because Organovo has been mum on the topic.
The impact of so many bullish articles in such a short period of time has been significant. Organovo quickly hit new all time highs. Despite very limited fundamental strength, the company last week reached a market cap of over $1 billion.
Once this happened, the widespread media sentiment quickly reversed itself. Those who had been telling us to buy Organovo as a play on the soon-to-be-realized future, quickly reversed themselves and began telling us to sell Organovo because it was overpriced.
Yesterday Seeking Alpha author Richard Pearson produced data showing that total revenues over the coming years would amount to just a few million dollars, far less than the hundreds of millions that investors had started to expect. He also highlighted insider selling and a new equity registration statement among other things. The stock fell as much as 30% and briefly fell below $9.00.
By the end of the day, the Motley Fool had issued a new article entitled "Should You Invest in the Wild Swings of Organovo Holdings?" which stated that Organovo was worth less than $500 million, or around $5.50 per share. However, it appears that the article has since been removed from the Motley Fool. The Motley Fool has been uniquely and consistently bullish on ONVO for weeks, coinciding with the run up in the stock.
Yet this latest article which came following the crash states that:
"I think Organovo is an intriguing story, but I can't rationalize a $1 billion valuation for the company. Heck, even $500million looks absurd to me."
For some reason this article was pulled within two hours of publication. Fortunately I had a cached copy which I have posted here.
These were not the first warnings that media sentiment was swinging against Organovo. A few days ago, the Motley Fool also noted that:
"Investing in a company simply because it is in a hot industry can be a recipe for disaster. One need only look back to the dot-com bubble at the turn of the century to see that just because a company is associated with a "hot" trend by no means makes it a solid investment. Remember, Organovo is currently valued just shy of $1 billion, and yet has produced just $129,000 in revenue over the past six months. The company might have potential, but it is by no means in the league of 3D Systems or Stratasys right now."
Meanwhile, Seeking Alpha contributor Guru Fund Picks noted "Organovo: Love The Technology, Like The Company, But Wait To Buy The Stock" and suggested that a pullback was likely. Even bullish author Kevin Quon put out an article entitled "Organovo: Is Now The Time To Sell This Rising Star?" (When an author asks "Could Tesla fall to $100" they really mean that "Tesla will fall to $100". Likewise, when an author asks "Is now the time to sell Organovo", he is largely saying "Now is the time to sell Organovo")
Jim Cramer also weighed in, calling the stock "too speculative".
So what is really going on here ?
Investors who follow the headlines should have seen the rise in Organovo as fairly predictable. At the same time, the current drop is also predictable. Both are simply a function of heavy media exposure for a company that has minimal revenues and has provided no guidance. Organovo is entirely at the mercy of media exposure, and right now media exposure is turning negative.
Organovo is the very definition of a "sentiment stock". The company has virtually no revenues and will not even have a product on the market for over a year. The stock price is heavily influenced simply by the mood of the day. For a number of months (and when the share price was low) the media pundits and independent authors were confidently saying "buy, buy, buy" and this is what sent the stock soaring. There haven't been any significant developments with the company during the past two months which would in any way change the timing or size of future revenues.
Now that the stock has nearly doubled, there has been an equally large wave of articles saying "sell, sell, sell". The wake up call for many investors was likely when the company exceeded $1 billion in market cap. With no product on the market for at least another year, and with very limited visibility on how much revenue to actually expect, it becomes very difficult to see how the stock could hold at this high valuation. There are hundreds of other companies out there with billion dollar valuations and with very strong fundamentals and clear visibility in terms of revenue and profit.
That is the main problem with "sentiment stocks". Sentiment which is expressed in articles often becomes a self fulfilling prophecy, even in the absence of any news from a company.
For months, the pundits were pushing us to buy Organovo and we have now seen the stock price double. But in the last 10 days we have seen the pendulum swing to a strong bias towards selling Organovo due to its incredibly high price and valuation.
Once again we may witness a self fulfilling prophecy of selling. The stock rose dramatically from $5.50 to $13.65 despite no good news from the company. Now we will likely see the stock fall just as dramatically and again without any bad news from the company.
Organovo is certainly in an interesting business and it may hold strong prospects sometime in 2015-2016 and going forward. Given that the stock rose without any new developments, we are likely to see it return from whence it came - back below $6.00 - in the next few weeks. The pundits are already pushing the stock in this direction. Once the stock returns to more reasonable levels, taking a speculative position might make sense because the recent surge may create the possibility of future surges back to these levels.
However, now that multiple media sources are lining up against the stock, this stock is quote risky.
The conclusion from this is that investing in pre-revenue sentiment stocks can often be little more than gambling. One can hope that a sustained stream of positive press exposure will come out and benefit ones position. But if that does materialize, it is typically best to sell into the strength. Over the long term, what should drive stock prices is steady progress towards a sustained earnings model. But with sentiment stocks this is not the case.
It seems reasonable that Organovo would return to around $6.50, where it was before this run. However, with Organovo, a short position is just as unfounded as a long position. Because the real determinant of the share price simply appears to be how many authors will say positive or negative things about the stock in any given week.
The right strategy for Organovo is to take no position until there is real and verifiable news which is issued by the company rather than by the whimsical pundits. This means that investors with an interest in Organovo should most likely place themselves on the sidelines until mid 2014 when we have better visibility on revenue prospects from the 3D liver assays.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.