If there's one silver lining to the global coronavirus pandemic it's increased appreciation for quick and easy infectious disease testing. Quidel (QDEL) was already a leader in the market for point-of-care diagnostic equipment before launching COVID-19 tests.
It's hard to know how long to expect explosive demand for coronavirus testing, but it's just a matter of time before Quidel's explosive new revenue stream settles down. Does Quidel have what it takes to deliver market-beating gains into the long run?
Reasons to buy Quidel
The company's point-of-care diagnostic systems look like point-of-sale (POS) devices that accept patient samples instead of credit cards.
Sales of Quidel's tests have been on the rise partly because every time the company releases a new one, its existing customers can add it to their list of on-site services without installing any new gear. For example, the company's Sofia SARS Antigen FIA test runs on the same devices already used in physician offices to diagnose strep throat, influenza, and Lyme disease.
In June, the company received government funding to support the development of a test-combo kit that can tell doctors if patients have the respiratory syncytial virus, influenza A, influenza B, or COVID-19. The four-virus test will run on the same Sofia machines, making them more valuable to Quidel's clients.
Diagnostics is an excruciatingly competitive business, but Quidel's reported an outstanding double-digit percentage operating profit margin since 2018. Since launching the popular Sofia 2 point-of-care system in 2017, trailing free cash flow has risen 831% to $135 million.
Strong cash flows at the moment, plus a bolus of COVID-19 revenue, will give Quidel plenty of opportunities to acquire and develop new test offerings that make its point-of-care diagnostic systems even stickier in the years ahead.
In May, Quidel reported first-quarter revenue that grew 18% year over year to an annualized $699 million. Quidel thinks its non-coronavirus projects represent a market opportunity worth around $1.7 billion annually, which gives the company room to continue putting up big gains.
Reasons to remain cautious
Small, relatively inexpensive analyzers that allow physician offices, urgent care centers, and hospitals to rapidly diagnose infectious diseases and measure health signals on-site are increasingly popular. Unfortunately, they're inexpensive enough that hospitals and many physician offices can afford a Sofia 2 and at least one competing machine.
One of Quidel's largest competitors for point-of-care testing, Abbott (ABT 0.01%) will be a fierce competitor in the years ahead. The successful healthcare conglomerate boasts diverse operations that generated $4.5 billion in free cash flow over the past year.
Quidel's fluorescent immunoassays are generally faster than desktop molecular diagnostics, but Abbott's ID Now system can deliver results in a matter of minutes. With an increasing array of options for low-cost, rapid testing, Quidel's juicy profit margins could face more pressure than the company can handle in the years ahead.
A buy now?
The coronavirus pandemic will be with us into 2021 at the very least, but hopefully not for much longer. This means any coronavirus stock you add to your portfolio now needs revenue streams that won't dry up along with demand COVID-19 testing.
Quidel's successful line of point-of-care diagnostic equipment was already generating a strong and steadily growing profit before the pandemic reared its ugly head, and it will probably continue doing so for many years to come. If you're looking for a good coronavirus stock to buy, this is it.