The coronavirus outbreak has absolutely crushed the stock market and economy. Very few companies have managed to avoid the wreckage. However, biotech companies have been one exception. Firms that have any connection to possible coronavirus products are now in high demand. Co-Diagnostics (NASDAQ:CODX) stock is one such example. CODX stock has shot up a stunning 850% year-to-date.
Up until this year, Co-Diagnostics has been a generally small and unsuccessful firm. Since its initial public offering a few years ago, shares had fallen 80%. Now they’ve recovered those losses and more.
However, the company has achieved little in the way of revenues or profits since it went public, and there is little concrete evidence that its coronavirus test will be a big winner either. Investors would be wise to treat Co-Diagnostics stock with a great deal of caution.
CODX Stock Is a Long Shot
There are several reasons to be skeptical that Co-Diagnostics, in fact, has created a market-leading coronavirus test. For one thing, the company claims to have developed its test in just one week. Larger, more reputable firms took significantly longer in developing their coronavirus tests.
The company has obtained some relevant certifications for its coronavirus test, such as Europe’s CE Mark. However, it has not yet garnered specific FDA approval, whereas other companies have already gotten that all-important seal of approval.
It seems likely that big well-respected companies like Roche and Thermo Fischer Scientific (NYSE:TMO) will earn the majority of coronavirus testing revenues. Meanwhile, at least up until now, Co-Diagnostics has primarily been announcing distribution deals in smaller markets like Moldova and Romania.
It’s worth considering the size of Co-Diagnostic’s R&D budget. In both 2018 and 2019, Co-Diagnostics spent $1.4 million on research and development. Before investing in CODX stock, it’s worth thinking about that figure for a second. Will a company that spends less than $2 million per year on research and that has no history of commercially successful products out-compete the giants in its space? Probably not.
Rushing From One Virus to the Next One
In an article discussing another coronavirus biotech stock, Inovio Pharmaceuticals (NASDAQ:INO), I noted how it tends to jump from one disease to another. Inovio still has clinical trials for things like its zika vaccine, even though zika came and went years ago. Predictably, Inovio has struggled to generate meaningful revenues. If you don’t come up with commercial products until after a pandemic passes, market demand will be muted, after all.
Co-Diagnostic seemingly faces the same problem. It has created tests for other diseases that were problematic in previous years, such as zika and chikungunya. However, those diseases have largely died down in recent years, and Co-Diagnostics has scored next to no revenues for their efforts.
By the time Co-Diagnostics gets its coronavirus test approved for major developed markets (if it ever happens at all) it may be too late to gain any significant commercial benefit from the effort.
Stock Price Versus Fundamentals
As our David Moadel noted, the main problem with CODX stock right now is its price. Shares have run up hundreds of percent in recent weeks. That’s despite there being a lack of any clear indication as to how much revenue its coronavirus test might generate.
The stock market is now assigning a $200 million valuation to Co-Diagnostics, a company that spends less than 1% of that amount per year on R&D. If it were that easy and profitable to generate highly-successful tests for novel viruses, you’d think more companies would do it.
If Co-Diagnostics were trading at a low valuation, maybe the stock would be a worthwhile speculation. But at this price, investors are paying a lot of money for a company whose primary product is seemingly primarily being distributed in commercially limited emerging markets at the moment.
CODX Stock Verdict
These low-priced coronavirus stocks can be fun to trade. If you’re skilled at short-term trading, there are certainly plenty of opportunities, but don’t forget to sell before the hype fades.
As we’ve seen with the blockchain mania in 2018 or the marijuana stocks in 2019, hot trading vehicles often turn into crushing losers if you hold them too long. Co-Diagnostics, and various other biotech firms pivoting to coronavirus lately, will likely to follow the historical example.
The leading coronavirus diagnostic simply isn’t likely to come from a company with an R&D budget of just $1.4 million per year. You already have a ton of large companies with approved coronavirus tests on the market.
It’s a leap of faith to assume a tiny player like Co-Diagnostics will secure much market share. Co-Diagnostics may spike again in the short-term, but over the long-haul, shares are likely to trend back toward the low single digits.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he held no positions in any of the aforementioned securities.