With the Market Skyrocketing after March lows, many seasoned Wall Street analysts have worried about “irrational exuberance.” This fear is especially prevalent in the biotech sector, where small cap valuations have boomed of late. No doubt a few biotech eagles will soar in value as they deliver vital cures to Society. But there are also plenty of turkeys out there. How to tell the difference?
Stock picker Alex Dinklage analyzes Nextcure, Inc ($NXTC) to see if the valuation holds up to scrutiny…
A couple months ago, hearing about an overvalued stock in the current market conditions would certainly be unusual with the pandemic taking a toll on pretty much every sector in the market. Now, as we saw in the downturn many stocks such as zoom (ZM), and ecommerce platforms such as Shopify (SHOP) have benefited from COVID as people work from home and are frequently shopping online more. With trillions of dollars being printed by the FED many claim this is propping the stock market up as many businesses are barely just recovering and unemployment is still up. All this printed money and excessive unemployment checks have caused the market to begin to climb widely, as the Nasdaq hit a record high close just a few days ago. With all this money in circulation some stocks have begun to rise again and now some trade at an absurd valuation making them clearly overvalued. One of these overvalued stocks is NextCure (Nasdaq: NXTC). As many investors in the biotech world understand biotech is very volatile. These companies have the potential to create revolutionary products that could save lives, which means there is much speculation on whether each company can win federal approval on what they have set out to accomplish.
NextCure is a clinical-stage biopharmaceutical company, which engages in discovering and developing new immunomedicines that help treat and prevent cancer as well as other immune diseases. They accomplish this by studying various immune cells to discover and understand targets and structural components of different and various immune cells and their functional impact in order to develop immunomedicines. Their mission focus is to bring hope and new treatments to patients who have not responded well to current cancer therapies, as well as patients with cancer types are not adequately addressed by current available therapies. Currently, NextCure has two immunomedicines in clinical trial, NC318 and NC410. They are both believed to treat multiple cancer types, but both are currently still in the clinical testing phase. Like many companies, NextCure has been forced to adjust their protocols and timelines due to COVID and at the moment has been forced to delay both of their drugs trials. While their past trials have had successes, this should be a huge red flag. At the current moment, with no recording data and no trials active, the company cannot begin to test anything and will continue to burn through its cash quickly.
Taking a brief look at NextCure financials we see that it is a small cap company with a market cap of $667.70MM with only two products that have a long way to go to be approved for the general public. Since NextCure has not established itself in the biotech sector yet there is much speculation on whether this company will be profitable in the long run. Taking a quick look at the company’s stock price it us currently trading at $24.18 and is actually trading near its 52-week low. Seems like it could be a good deal? Here’s why we don’t think so. The only reason why the stock seems so low and looks like a bargain price right now is the fact that NextCures stock price jumped 248.9% last year in ONE single day. This was due to leaked information regarding successful clinical trials. As biotechs are known to do, most of these gains washed away as the share price imploded on itself. NextCure used this surgery to raise $150M to be able to secure funding for their next trial rounds; in a sense they got lucky. NextCure’s has never had a profitable year in regards to return on assets or equity. Their operating margin, which measures how much profit a company makes on a dollar of sales after variable costs are paid out is -590%; astronomically high. This just demonstrates the very high risk associated with NextCures as well as can indicate a poorly managed company. Additionally, thinking about the trials on hold, it could be a long time or never that NextCures makes a profit especially considering the current EBITA margin is –71.5%.
Looking more into the quality of NextCures from a long-term perspective, they have a cash burn rate of -1.30 which displays the negative cash flow the company burns each month. You would expect a negative number here for a small cap biotech company that is still in the clinical trials, but the fact that their EBITDA (earnings before interest, taxes, depreciation and amortization) for the last twelve months (LTM) is a little south of negative 20M is super concerning for the upcoming year. Afterall, things for NextCures so far for 2020 have not started out well. Additionally, looking just short term for this upcoming year, NextCure last year (2019) spent $36M on operating activities and $304M on investing activities, as shown in their Cash Flow Statement. Even with this huge cash burn, they only successfully completed 1 phase of testing! With an adjusted interest coverage ratio of –166.48 which measures the ability of a company to pay interest on their outstanding debts, NextCure needs a major breakthrough in its testing to be profitable for the foreseeable future. Using a 5-year discounted cash flow model from FinBox, their revenue actually increases in 2020, but still shows their stock price as overvalued by 31%.
While NextCure does look overvalued and has unhealthy financials at the current moment, there does seem to be reasonably stable growth as they do have a stable EPS. Also, they are very liquid, having 336M in cash and short term investments (Balance Sheet) which will be crucial for their upcoming year in this volatile market.
So, while NextCure at the current moment does look overvalued and does not look like it will be profitable for the upcoming future, that does not mean that there isn’t potential for future success. I would keep NextCure on your watch list for the foreseeable future. If the stock price drops considerably lower or their trials began starting again with success, this early-stage biopharma could be a winner.