Co-Diagnostics: Why Traders Shouldn't Take COVID-19 Stocks Too Seriously

Summary

• 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.

Latest earnings

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.

Conclusion

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.

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.

Comments

[mastermind83]

Is now a good time to invest in CODX?

[NoNamesLeftToPick]

You seem to be missing the fact that they have A $50 million Dollar order pipeline

[EKim-2]

The info in this article is poorly documented and laughable. "Anemic" 1.6 million revenue and bad EPS he says, without considering the earnings growth it's been experiencing the last few quarters before corona-virus, the company clearing out it's debt, the institutions buying the company up - but no! All that matters to short sellers is if there's a P/E ratio or not. Then he says he sees "no chance" for sales to continue without backing up why that's so.

The final nail in the coffin is when this article says "assuming they sell [all twenty million kits], there's no way to know how much revenue that would bring." Yes there is, it's the price of one kit multiplied by twenty million. Basic arithmetic, but that doesn't occur to the author. This is not hyperbole, this is his exact words, paragraph 7 from the heading "Latest Earnings." The most abysmal thing tied to this company has to be the information presented here. The reason this article is so brief is because it was one breath away from perpetrating a short-and-distort scheme if it tried to insinuate how bad this company was.

[tava]

I am not sure why you are using $50 as the basis for the price for a test, or as you say "If it prices and sells the kits at half of $50 or a little less...". Those statements are completely futile with respect to CODX. If you would know CODX, you would know that their pricing is $7 per test. In their vision statement on their website they say "...positioning Co-Diagnostics to be the worldwide low-cost leader of molecular diagnostics services". Besides their patented technology, their superior accuracy, the relatively high speed for performing up to 48 simultaneous tests per kit, and their manufacturing capabilitites through partners, this is what sets them apart from other companies.

[Duras]

I'm in agreement with the three previous commentators, @Phishphan, @Reality_is_real, @VCme, and I invested in CODX for about the same reasons @Phishphan laid out so very well. I can only add that these small biotechs with their small floats are a target for short sellers who want to manipulate the market. That can lead to some serious distortions and untruths getting put out in comment sections here and elsewhere and in some articles -- please note I'm not suggesting this article is in that category. I'm here for the money (and the fun), so is my banker, we'll see.

[Phishphan]

I see your side of the coin, good write up, but here’s the side of the coin I’m looking at. You wrote that the q1 earnings report was underwhelming, but if I remember correctly the emergency fda approval came w/ only 3 days left in the first quarter, so of course sales #s q1 didn’t reveal much. They met q2 sales quota already, I believe 14 days into q2. The sales #s in q2 will be through the roof. I am very bullish on this stock, 1625 shares and I’m looking to add more shares still. The stock has found a floor at $17.5 to $18 range and has touched the $31 mark recently. Uncle Sam played hot potato initially w/ testing while Covid was first spreading but they’ve finally told the states to fend for themselves which they have. Codx sells to many states, India (where they also have a test Mfg facility) Russia among many many other countries around the globe. There tests are very accurate and affordable. Abbott’s labs tests give off high % of false positives and false negatives, Codx tests do not. Codx is now a possible target for acquisition by larger companies as well. Additionally Codx is about to get emergency fda approval for a spit test kit which will be in huge demand here in the USA and abroad in places such as India which has a population of 1.5 billion people and where a spit test would be ideal. I see a price of $45 a share mid q2 or early q2, this stock is going to gap up sooner than later. Also demand in the USA might increase even further in the next 30 days due to the protests & riots where people have clearly been in very close quarters with each other for long periods of time. The cherry on top of all of this is Major League Baseball stated in a recent Espn article that they were working on a testing solution w/ the lab they already use for steroid testing for all mlb players and that lab is in Utah and located literally 3.2 Miles away from Codx headquarters. If Mlb plays in 2020 and 2021 I wonder who would provide test kits to the lab and the MLB seeing they are literally an 8 minute drive away from Codx headquarters. I understand your cautious wait and see approach but to me I love this stocks potential and obvious upside in the short and midterm. In my opinion, skate to where the puck is going, not to where the puck is at the moment.

[Reality_is_real]

You need to do a bit more research to know that the company has existed since 2013 based on superior proprietary PCR technology. It get more notice due to covid, but its value it not from selling test kits.

[VCme]

You are leaving out a lot of key elements that have earned a current value for codx at $30, $35 and $36 price target.
Over 50 countries and 22 states are currently purchasing from codx. They have shown emasculate accuracy and sensitivity with their molecular test. Italy even found their test to identify covid before symptoms appear from a removed tumor. During Q1, codx had yet to get approval with cosara (in India). Now that’s running full steam ahead. That had just signed on with promega in Madison WI as a manufacturer. And it was 20 million being manufactured AND SOLD three weeks ago. They are already in the green on the year; all year expenses covered. Capable of making 4-6 million tests a week. And waiting for approval on their saliva test.
Folks want to feel safe at work, at college, kids in school. These tests are what is requires for that piece of mind and safety.
Btw: weak research here. No one is calling for $50 a kit. Large orders are being filled at $10 kit. No one is competing with that. 
Oh and many folks are drooling over the technology/patents they have in place.
Put all this together and that’s why Q2 report in July will verify this stock is worth $35 and will be due for another increase. Wait until after q2 and miss out.
This is not a vaccine lottery ticket stock or an antiviral drug that hopefully helps folks. Those two categories typically have a lot of cash burn, little to no revenue and living in hope. That’s a FOMO stock.
This is a PROVEN winner that has an amazing product in the pipeline, another one coming and is already very profitable. Like you said, 71% profit in revenue. That’s huge! And it is because they own all their technology.
I could go on and on; this piece is garbage and leaves out a lot of truths about codx. I boo this man

[zerobid]

Your the one that might get booed here as Covad hype subsides, and this crashes under 5. You have not done your homework on the promotional nature of this company, the history of pumps, and some of the suspect characters involved, like the CFO, affiliated with other stock pumps in the past.