Novacyt (LSE: NCYT) was a bit of a stock market darling throughout 2020 and into 2021. A couple of super high peaks did quickly decline, but things were still looking pretty rosy.
But then in April, the NCYT share price suddenly nosedived. And since then it’s continued to drift downwards.
Until Wednesday, that is, when we saw the shares climb 20% in just one day. Before I get too excited about that though, I need to put it into perspective. This latest increase puts Novacyt up 24% over the past 12 months. But at its earlier peaks, in October 2020 and again in January 2021, we were looking at gains of 300%.
Novacyt is a specialist in Covid-19 testing. We had been hoping for, and expecting, an effective vaccine since the very start of the pandemic. But it’s been clear for some time the virus will be with us for the long term, just like influenza. And testing demand will presumably continue with it.
The new Novacyt share price spike is down to a first-half update. Total revenue increased by 50% compared to the first half of 2020. Revenue from the firm’s contract with the UK’s Department of Health and Social Care (DHSC), which accounts for 43% of the total, jumped 121%.
Reasons for caution
That’s good, but I’m cautious over the comparatives with last year. They include a period when Novacyt was just getting started with its testing development, before sales had kicked off. My Motley Fool colleague Roland Head has raised a few concerns too, all of which I share. The most important issue, I think, is the reason for April’s price slump.
Novacyt had a contract with the DHSC for the provision of test kits, and expected it to be extended. It didn’t happen, and the announcement of the failure triggered the NCYT share price crash. In addition, there’s an ongoing legal dispute, and I fear that might prove expensive.
Further, it seems £40.8m of 2021 DHSC revenue is actually unpaid and still under dispute. That’s 43% of the first-half total. On the upside, the company still reckons it should achieve around £100m in non-DHSC revenue for the full year. But I really think I’d want to see how the dispute turns out before I’d consider buying.
NCYT share price valuation
On the upside, I can see demand for Covid testing continuing at high levels for the foreseeable future. And based solely on the mooted £100m revenue, Roland estimates a forward P/E multiple of only around seven. That, for a stock with growth potential, looks very attractive. And it does tempt me.
But I don’t know what the balance sheet looks like at the moment, and there are just too many uncertainties for me to invest right now. I generally tend to keep away from companies in legal disputes with their biggest customers too.
I’ll keep watching though, and hoping for future Novacyt share price dips.
