The coronavirus pandemic has added significant uncertainty to the stock market. While restaurants and airlines are among the most obvious parts of the economy to be negatively impacted, many not-so-obvious markets -- such as clinical trials, used-car sales, and real estate -- are likely to feel the brunt of the economic slowdown, too.
That makes many stocks riskier now than they were just a few months ago. Then again, many depressed valuations also suggest there could be better long-term returns at current entry points. Investors looking for high-risk, high-reward stocks might want to take a closer look at Avid Bioservices (NASDAQ:CDMO) and Enphase Energy (NASDAQ:ENPH).
Is this stock a bargain after recent setbacks?
As the stock ticker implies, Avid Bioservices is a contract development and manufacturing organization (CDMO). The company manufactures biologic drugs for pharmaceutical companies and helps customers to develop manufacturing processes. On paper, it's a pretty sweet niche. In reality, it's been a little more complicated.
Avid Bioservices has manufactured biologic drugs since 1993, but it has only just begun to scale its business. If the company can execute, then there's a tremendous opportunity ahead. There were 110 monoclonal antibodies approved for use by the U.S. Food and Drug Administration at the end of 2019 and another 550 in clinical trials. Meanwhile, there were over 1,000 clinical trials underway in gene therapies and cellular medicines.
Execution has been a stumbling block so far. Avid Bioservices recently encountered problems with a specific piece of equipment, which forced it to void in-process manufacturing runs and push back those for other customers. As a result, the CDMO had to revise fiscal full-year 2020 revenue guidance from at least $64 million to a lower expectation of at least $55 million. The business tumbled to a valuation of less than $300 million shortly thereafter.
The setback impacted operating margins in the fiscal third quarter of 2020 and will do the same for the final quarter of the company's fiscal year. Despite that, Avid Bioservices managed to add contracts from both existing and new customers and grow its backlog to $58 million, a 12% increase from the previous quarter.
Given the rapid expansion of the biopharma industry, there's tremendous potential for Avid Bioservices to expand operations and generate healthy profit margins as it scales. Through the nine months ended Jan. 31, 2020, the business reported an operating loss of $5.7 million. That could be relatively manageable, but the risk is that the company cannot scale operations in the face of better-equipped competitors, especially if the coronavirus pandemic reduces drug demand.
Then again, the reward is that the business proves successful and this becomes an under-the-radar growth stock. For now, investors should at least keep it on their watch list.
Will awesome growth meet crushing consumption constraints?
Enphase Energy became one of the best growth stocks on the market in 2019, but the coronavirus outbreak will impart uncertainty onto the company's trajectory.
On the one hand, stay-at-home orders are likely to have a severe negative impact on growth. On the other hand, to be blunt about it, the customers most likely to install solar panels on their businesses or residences are the least likely to be suffering from the economic impacts of the health crisis.
While shares of Enphase Energy have delivered impressive returns in recent years, investors need to consider the challenges facing any business in the solar industry. Enphase Energy has to sell microinverters at a competitive cost, continuously lower prices for its new energy storage products, and keep pace with broader commodity headwinds and market cycles facing the industry. Those obstacles were in place before the coronavirus pandemic hit.
To be fair, those issues must be addressed by all companies in the space. Enphase Energy has done a great job of scaling its business and achieving operating profits, but recent stock movements suggest Wall Street isn't appreciating the potential for severe negative impacts on the business.
Enphase Energy generated 33% of full-year 2019 revenue from two customers, one of which was SunPower, to which it supplies microinverters for solar modules. As of April 17, the business was valued at $4.8 billion and the stock traded at 34 times future earnings and eight times trailing sales -- both pretty expensive.
While the solar stock is risky in light of the likely disruptions from this pandemic, there's also considerable potential for long-term upside. For one thing, the American solar market is robust, growing by double digits each year for the last decade. Enphase Energy generated 84% of total full-year 2019 revenue in the United States. For another, investors cannot rule out that future stimulus packages will include generous subsidies (including expansions of existing subsidies) for renewable energy technologies. That makes this growth stock a high-risk, high-reward investment -- at least until it provides a first-quarter 2020 update in the coming weeks.