- A look at whether or not Co-Diagnostics' big surge is sustainable or justified.
- Why its latest earnings report really has little bearing on the future performance of the company.
- How to play a stock like Co-Diagnostics.
source: company website
It's no secret that biotech stocks associated with COVID-19 have been soaring in response to a seemingly endless number of press releases, with investors and many traders being triggered into taking positions in a lot of these companies because of fear of missing out (FOMO).
One of the biotech companies generating a lot of interest from investors is Co-Diagnostics (NASDAQ:CODX), which has soared since the latter part of January 2020, when it was trading for about $2.00 per share, rising to $18.00 per share at close of May 29, 2020. It had jumped to over $23.00 per share in the middle of May, 2020.
In this article I want to explore whether or not Co-Diagnostics is a serious contender in the COVID-19 segment, and if investors and traders should take it seriously for a long-term holding. The other option is to take trading positions in response to wide swings in its share price for a short period of time - both short or long.
Few of these newly discovered biotech companies have earnings that are relevant to their outlook because they were generating little in the way of revenue until the coronavirus crisis emerged, and even now, not many of them are getting a significant boost from sales because they have yet to materialize in a meaningful way.
With that in mind, the latest earnings report of Co-Diagnostics should be used as more of a confirmation of its weak and unpredictable performance, rather than having any visible significance to the long-term future of the company.
With the company and pumpers pointing out the demand for its testing kits throughout the last quarter, it generated a lot of excitement and expectations concerning its earnings numbers for the reporting period. To say it was underwhelming would be an understatement.
Revenue for the reporting period reached a anemic $1.6 million, while the company had a loss of $0.05 per share. That was a penny under expectations.
That said, most of the impact on the numbers coming from sold kits should initially come in the current quarter, so that could change significantly to the upper side.
While the company said its gross margins for sales of its Logix Smart™ COVID-19 test kits was 71.5 percent, I don't see it having any chance of keeping those numbers close to that level going forward.
There is also no clarity concerning whether or not the company will be able to sell its millions of kits for now, or in the months and years ahead. So even though it's about to manufacture 20 million kits, and assuming they sell them all, it's impossible to know what type of revenue that will generate and what the potential margins and earnings will look like.
Barron's estimates that tests like those provided by Co-Diagnostics sell for about $50 each, based upon what government health plans pay out. Even if that's true, there's no doubt the government will negotiate that price level down because of its large orders. If it prices and sells the kits at half of $50 or a little less, and sells 20 million of them, that is a hefty revenue stream if the company is able to pull it off. The obvious concern is just because the company has the capacity to manufacture a lot of kits doesn't mean it has that many orders in place.
With no idea how this is going to play out, there is no viable way to put a value on the company with the information we know today. There is also the issue of increasing competition that could cut into its sales potential.
If a person is going to go long with Co-Diagnostics in order to hold for awhile, I would wait to see how it is really doing in the next couple of earnings reports; resist the FOMO that accompanies the hype associated with stocks like this.
How to play the company
For now, I see no reason to have any conviction concerning the company. With that mindset, there is money to be made on both sides of the play. I see a lot of arguments for longs and shorts concerning the company, but all of that should be within the parameters of holding the company for a relatively short period of time.
There is nothing to confirm, one way or the other, as to how the company will perform going forward, or if it will be able to generate the type of sales bulls are convinced it will.
It's possible it could surprise to the upside, but there's no way of knowing that at this time. That means it's rolling the dice for those looking to hold - whether it's going short or long.
Biotech companies like this are a great way to build up your account fairly quickly, but to be convinced about the prospects of the company as it stands today is, in my opinion, extremely premature.
Co-Diagnostics is a great play for traders, but a very weak one for those desiring to hold for a prolonged period of time. My conclusion is the company has yet to prove it has the number of orders in place to produce some significant revenue over the next couple of years, assuming COVID-19 remains a thing.
With that in mind, I believe any investor with an interest in the company should wait for the next earnings report at least, and even better: two more. I would only change that if the company gives some solid guidance in the next report based upon provable facts, such as larger orders from reliable institutions.
As with all the smaller biotechs associated with COVID-19, Co-Diagnostics offers great opportunities to move in and out of the stock - whether going short or long - and capture some significant gains.
Playing it any differently than that could generate some big losses for those without the discipline to get out quickly if the play goes against them.
Either way, this is definitely a stock I wouldn't take a position in with money I couldn't afford to lose. Taking a position, for most traders and investors, should, for now, only be for a short period of time in response to the action of the market in relationship to the share price of the stock.
To take a position in the stock for the long term is a good way to be quickly parted with your money. We should wait until the earnings reports come out before committing to holding for a prolonged period of time.
This article was written by
Analyst’s Disclosure: I/we 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.