If you've been following the race to discover a coronavirus vaccine, it won't be any shock to hear that both Moderna Therapeutics (MRNA 0.89%) and Inovio Pharmaceuticals (INO -2.02%) are among the top 100 most-traded stocks on Robinhood. Between their vigorous price movements in the last five months and their consistently advancing vaccine programs, each company's market cap has ballooned to unpredictable heights far in excess of the pre-pandemic norms.
Even if these stocks present the opportunity for speculators to make a quick profit, skeptics are quick to point out that neither company has any products approved for sale. Nor do they have favorable performance or price characteristics. While these minor quibbles might not be very convincing to Robinhood traders, if you're evaluating these two stocks for a long-term portfolio, it's critical to understand which investing metrics to monitor and why so you can make an informed decision.
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Keep inflated prices in context
The problem with Inovio and Moderna isn't that their coronavirus vaccine candidates or their other pipeline programs are unlikely to succeed. In fact, both companies have reported favorable clinical trial results for their coronavirus candidates so far. The issue is that the stocks today are overpriced compared to their known value and historical earnings. Specifically, they both underperform according to two metrics: revenue growth and price-to-book ratio.
Consistent revenue growth over time is the most obvious area in which Inovio and Moderna are lacking. As neither company has any products approved for sale, they only derive revenues from drug development collaborations and technology licensing, which isn't enough to make them remotely profitable. Both have earned less and less over time, with Moderna's trailing 12-month revenues down 45% in the past three years and Inovio's down by 93%; this has left the companies with inflows of $106 million and $2.7 million, respectively, over the past 12 months.
If their coronavirus vaccine candidates are successful, this trend could reverse, but buying stocks based on a short-term hope rather than the company's enduring attributes is close to gambling. That doesn't mean you should avoid these companies, but it does mean that you need to be careful about buying them at full price.
These stocks aren't bargains, but they could be good investments anyway
Moderna and Inovio also fall flat in terms of their price-to-book (P/B) ratio. In case you aren't familiar, you can calculate the P/B ratio of a stock by dividing its price by its book value per share. Companies in the biotech industry have an average P/B of 6.2; based on the most recent quarter, Moderna's is around 9, and Inovio's is roughly 17. This means that if you bought their stock today, you would get less book value per dollar than you would with an average biotech company.
Of course, Robinhood traders probably aren't chasing the best P/B ratio when they buy these stocks. Even if they can't articulate it, they are betting that both companies have substantial intangible value based on their coronavirus vaccine programs -- and intangible value from internally developed intellectual property isn't reflected in a company's balance sheet, so it isn't accounted for in the P/B ratio. In other words, the Robinhood traders seem to be gambling that breakthroughs in the clinic will cause the stock price to go up as the market prices increase in intangible value, which may eventually be realized in the form of new revenue. They aren't necessarily wrong, but blindly following in their footsteps won't make you a more capable investor.
My message here is not that you should avoid these stocks, or that Robinhood traders are doomed to take heavy losses. There's nothing wrong with taking a calculated risk on a company engaged in highly lucrative projects like a coronavirus vaccine. Instead, I would suggest that you consider how you would argue in favor of buying Moderna or Inovio stock at their current prices before deciding. No matter what you come up with, you'll have done the evaluative work that so many Robinhood traders don't bother to do, and you'll be a better investor as a result.
