Abcam: Antibody Provider Has Potential, But Is Yet To Deliver

Summary

• Abcam develops antibodies and provides them to life science research firms in the U.S., EMEA, and China.
• Revenue growth is cyclical, with the highest YoY number at around 24% and the lowest at -2%.
• Net income is on a downward trend, with current net income TTM (trailing 12 months) of around $9 million.
• My analysis shows that the stock is overvalued.
• That significant gap vs. my intrinsic value calculation prompts my hold rating.

gorodenkoff

Abcam (NASDAQ:ABCM) has a mixed outlook post-pandemic. Although the firm says it's on the right track with its five-year growth plan, I disagree with certain data provided by the company. The firm is in the life sciences sector, which generally isn't as affected as much as other sectors during recessions. The recent relatively steady performance of many biotech ETFs, such as the iShares Biotechnology ETF (IBB) and the SPDR S&P Biotech ETF (XBI), is recent evidence of this.

However, with its potential clients being research firms and government institutions, there is always a threat of reduced funding for certain projects its clients pursue. This means that ABCM is always one announcement away from a material hit to revenue. And, while revenues are on an uptrend, the firm's net income (on a downtrend since 2019) is something I would be wary of as an investor.

What Abcam Does

Abcam is a Cambridge, UK-headquartered life sciences firm. It provides proteomic tools (related to the measurement of proteins), and assay kits (used to carry out the analysis of that protein measurement) catering to customers working in academia, research institutes, and pharmaceutical/biotech companies around the world. These products are specific to the research divisions. Its main revenue driver is reproducible proteomic tools. Proteomic tools help measure gene expression, activity, and interactions at the protein level - in other words, how a gene translates itself into protein in the body. This helps a life science researcher in understanding various antigens and how antibodies react to these antigens.

Recent Corporate Performance

The firm has seven operational centers worldwide, with Singapore being the latest to be added to the list. Geographically, the firm's revenue is mainly attributed to the U.S. (40%), EMEA (27%), China (20%), and Japan (8%). Currently, the firm is facing threats with respect to developing intellectual property in China due to regulatory changes in that country.

Although Abcam's revenues are on an uptrend (except for the pandemic-driven revenue dip in 2020 that most companies endured), the year-over-year growth in revenues is cyclical. The highest year-over-year growth was around 24%, and the lowest was -2%. The cost of goods sold (COGS) has never declined, and gross profit margins never declined more than 70%, which appears to be a good sign. The lower the costs, the higher the share of profits to investors. R&D expenses, which are crucial for a firm in the life sciences sector, are in line with the firm's forward-looking statements (e.g., increasing their share of in-house production, currently 40% of the products).

As the firm is mainly aiming at growth, scalability, and strategic acquisitions, it stopped paying dividends to its shareholders as of June 2020. This coincided with the firm's decision to dramatically increase its cash flow into investing from $60 million in 2020 to $340 million TTM.

Strengths

Although we're seeing a global economic slowdown, I believe the effects will be less impactful on the life sciences sector. Also, the firm notes a positive outlook for scientific research post-pandemic. However, the company has said that the sales strategy is monitored to cater to the relevant areas where funding is invested.

A sector that requires highly qualified and trained professionals in general always has the threat of a shortage of such skilled workers. Abcam addresses the threat by focusing on employee satisfaction. It ranked No. 5 on the Glassdoor list of best places to work in the UK. That should help the firm in the turbulent labor situation we find ourselves in during 2023.

Weaknesses

The strong downward trend in the net profit margins from 20% in 2016 to 2% in 2022 is a point of concern for me. Analyzing the balance sheet, the cash ratio is 0.5, meaning the company can only address 50% of its short-term liabilities. Also, the firm has an increasing trend in its account receivables, which might mean that Abcam is selling its products on credit.

Abcam, a foreign company listed on the NYSE, does not need to file quarterly reports as per the rules of the exchange. Abcam delisted its regular shares from AIM on Dec. 13, 2022. So, the firm doesn't have to submit quarterly reports in either country. The form 6-Ks that Abcam submits have approximate financials that are unaudited. As an investor, I am hesitant about unaudited financials, although such situations are rare. I like to invest in a firm where I can track the audited financials frequently.

With a market capitalization of over $3 billion and a daily trading volume of around 400,000, the stock is not highly liquid. This puts it in the same category as hundreds of smaller U.S.-based biotech stocks. In other words, the reward potential for companies like Abcam nearly always comes with a significant risk of loss. Lack of liquidity is just one possible source of that loss.

Looking Forward

Given that the firm is in a high-growth cycle after its IPO on the NYSE, I don't think it's fair to value it based on DCF (discounted cash flow) basis. The P/E and EV/EBITDA multiples from the recent past are presented in the charts below. Although the P/E multiple for growth stocks is high, a current P/E of around 300x is much higher compared to the sector median of around 25x. The EV/EBITDA multiple of around 40x is twice that of its sector median.

Data by YCharts

However, I valued the firm based on the average comparable firms' EV/EBITDA and P/E multiple valuations.

Abcam PLC Valuation (Self)

My valuation based on P/E and EV/EBITDA multiples gives an average intrinsic stock price of $5 compared to the ~$14 the stock is currently trading at. This shows the stock is 200% overvalued.

There is no perfect way to value a stock like Abcam, given the growth phase it's in and the nature of the risks noted above. However, I believe my analysis gives a basic valuation vs. comparable firms in the industry.

Conclusion

Tracking opinion

Given that Abcam had its IPO in 2020 on the NYSE and delisted its shares from AIM, and given that the companies listed on AIM are less regulated small-medium cap growth companies, I am a bit hesitant to consider investing in the firm in current market conditions. Abcam aims to have sustainability and ESG as revenue and profit drivers going forward. The firm has an outlook on acquiring and scaling over the next few years, and I would like to closely monitor this stock.

The share price recently went from over $17 to just over $14, and now sits between those two levels after a sharp bounce. This has been the pattern for several months, and as small-cap growth investors know, that is a natural part of this type of investing. So, technical analysis is not a big factor for me in deriving a current or potential future opinion on Abcam.

Data by YCharts

Investment opinion

There are myriad reasons why I do not wish to invest in this stock right now. That said, until some of the uncertainties and opportunities are clarified over time, I can't urgently recommend that current holders sell it. Meager net income numbers over the past two years, financial data available only annually, and being illiquid based on daily trading volume are a few factors that make Abcam a classic small biotech stock. However, given its current upper trend in revenues and considering management's ability in steering the firm through the pandemic, I rate the stock a hold. There might just be something big going on here, but it's just way too early to tell.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.