January 22, 2021

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Is The Rally In Novocure’s Stock Overdone?

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After a stellar 3x rise since the March 23 levels of this year, at the current price of around $170 per share we believe Novocure stock (NASDAQ: NVCR), a company working on an innovative cancer treatment alternative using electric fields, has reached its near-term potential. NVCR stock has rallied from $57 to $170, significantly outperforming the S&P which moved 67% over the same period, with the resumption of economic activities as lockdowns are gradually lifted. The outperformance can be attributed to its plans to expand its technology in more common forms of cancer, including lung cancer. Currently, the company’s device, Optune, has been approved by the U.S. FDA for the treatment of glioblastoma and mesothelioma. Looking at a wider time horizon, NVCR stock is also up a whopping 736% from levels of $20 seen in early 2018, just over two years ago.

Some of the 736% rise of the last 2 years is justified by the roughly 98% growth seen in Novocure revenues from 2017 to 2019. The company saw a 17% growth in total shares outstanding, resulting in a 69% growth in revenue per share to $3.40 in 2019, compared to $2.01 in 2017. With the growth in RPS, the company’s P/S (price-to-sales) ratio also expanded. We believe the stock is likely to see downside after the recent uptick. Our dashboard, ‘What Factors Drove 736% Change in Novocure Stock between 2017 and now?, has the underlying numbers.

Novocure’s P/S multiple changed from 10x in 2017 to 25x in 2019. Now that the company’s P/S has expanded to 50x, there is a potential downside risk when the current P/S is compared to levels seen in the past years, P/S of around 10x at the end of 2017 and 12x in 2018.

So what’s the likely trigger and timing for downside?

The global spread of Coronavirus has so far not had any material impact on Novocure’s business, and the company has, in fact, reported a strong 39% revenue growth for the nine-month period ending September 2020. The earnings of $0.15 per share for the same period compares with a loss of $0.12 per share in the prior year period, led by improved gross margins and income tax gains. Looking forward, with more patients being enrolled in phase 3 trials for other tumor types. including brain, lung, and ovarian, the scope of Novocure’s Optune will likely see a significant expansion, subject to its success in these new studies. That said, much of these factors appear to be priced in the current stock value of $170, despite the expected growth in new patient starts.

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Looking at the broader economy, the actual recovery and its timing hinge on the containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again. While the expansion of Optune into other tumor types will bode well for NVCR stock, going by the valuation, the stock appears to be overbought. At levels of around $170, NVCR stock is trading at 38x its 2020 expected RPS of $4.46 and 32x its 2021 expected RPS of $5.32. This compares with P/S of under 12x seen in 2017 and 2018, making the stock appear vulnerable to downside risk.

What if you’re looking for a more balanced portfolio instead? Here’s ahigh quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

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