The Novacyt (LSE:NCYT) share price exploded by 6,450% in 2020, increasing from 13p to 852p in a single year! The share price has since fallen to 685p since, but that’s still a massive 5,270% surge. What caused this outstanding level of growth? Can it happen again? And should I be adding the stock to my portfolio?
The soaring NCYT share price
NCYT is a medical diagnostics company that develops and sells a range of pathogen testing kits. These are typically used within the medical, life science, and food industries. Before 2020 these products provided a steady stream of reliable and slowly increasing revenue.
But then the pandemic hit, creating the biggest opportunity for NCYT since its inception in 2006. To help fight Covid-19, the company launched the first rapid testing kit in January last year. This was the spark that led to NCYT’s share price explosion.
By September, the share price has already increased to 380p surrounding speculation on sales performance. And then it released its half-year results for 2020, which CEO Graham Mullis called “transformational”. He wasn’t exaggerating.
Due to the massive demand and limited supply of rapid Covid-19 tests, NCYT received a monumental amount of orders that led to a 900% growth in sales. Total revenue increased to €72.4m from €7.2m a year before. And underlying profits rose from a loss of €0.66m to a gain of €48.3m.
Needless to say, when a company can boost revenue by nine times, become profitable, and solidifies its balance sheet in the space of six months, an explosion in its share price is perfectly understandable.
Can it continue to grow?
Even after NCYT’s surge in share price, the company continues to trade at a P/E ratio of around 14. That is pretty low compared to some of the other diagnostic companies out there. So it certainly seems to have the capacity to grow further.
However, I doubt another 6,450% explosion will be happening anytime soon. There is no denying that the revenue boost is outstanding. But it originated almost entirely from the sale of rapid Covid-19 tests at a time when there weren’t many alternatives.
Today there are considerably more companies providing their own versions of these tests. So NCYT no longer has a monopoly on this market space. I believe demand will continue to rise in 2021 and possibly even 2022. And thus, the firm will continue to benefit from these sales. But over the long term, I think its success will ultimately be determined by how it invests its newly found wealth.
The bottom line
Without knowing how the firm intends to sustain its current level of revenue generation, I think it’s tricky to determine whether NCYT is a good investment even at its seemingly low share price. Personally, I’m waiting for more information, as there are simply too many unknowns about its longevity.
But suppose the management team can identify new ways to expand sales of its existing products unrelated to Covid-19. In that case, I may have to reconsider adding the stock to my portfolio.
