Please ensure Javascript is enabled for purposes of website accessibility

Is Novavax Stock Too Risky to Buy Today?

By David Jagielski – Oct 12, 2020 at 7:08AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The stock has soared by 2,700% so far this year. Is it still worth investing in today?

Clinical-stage biotech company Novavax (NVAX 1.50%) has been one of the hottest stocks on the markets this year, going from just $4 per share at the start of 2020 to $110 today -- and that's after a price decline in recent weeks.

There's a lot of excitement surrounding Novavax and its COVID-19 vaccine efforts, but with a valuation that's skyrocketed so much in a short period, it may be too risky a buy for most investors. Let's take a closer look at the company's business, what it would look like without a vaccine, and whether it's still a good buy today.

Phase 3 trials of its COVID-19 vaccine candidate have begun

The main reason Novavax shares are doing so well this year is thanks to the hype surrounding the company's coronavirus vaccine candidate, NVX-CoV2373. On Sept. 24, the company announced that it would be starting phase 3 trials and that it would look to enroll up to 10,000 people in the U.K.-based study.

Novavax is one of several companies working on a COVID-19 vaccine. Johnson & JohnsonModerna, and AstraZeneca are just some of the bigger names that are currently testing possible vaccine candidates, trying to balance safety and urgency to help stop the spread of a virus that's infected more than 36 million people around the world and killed more than 1 million thus far. However, Novavax investors have no guarantees that its vaccine candidate will succeed -- or that the U.S. Food and Drug Administration (FDA) will give it the green light when all is said and done.

Woman wearing surgical mask while riding a bus.

Image source: Getty Images.

What if Novavax fails?

This is the big question investors should be asking themselves right now. Although the company reported good results from phase 1 clinical trials of its vaccine candidate, that doesn't guarantee it'll make it to the finish line. Novavax only began phase 2 trials in August and phase 3 in late September; it's still far too early to tell whether the vaccine will be effective in preventing COVID-19 infections.

There's a lot riding on the clinical-stage company's vaccine efforts, which are generating much of Novavax's revenue right now. For the six months ending June 30, the company's grant revenue totaled $38.9 million -- more than five times the $7.3 million it reported in the same period last year. Management credits the increase in grant revenue to the work it performed under its agreement with the Coalition for Epidemic Preparedness Innovations, which relates to the development of NVX-CoV2373. And while the company reported a hefty loss of $43.4 million over the past two quarters, it was nonetheless a big improvement from the $82.8 million loss posted during the prior-year period.  

That said, there is hope beyond just its COVID-19 vaccine efforts. Management is optimistic about Nanoflu, an influenza vaccine that analysts estimate could bring in between $550 million and $1.7 billion in annual revenue at its peak. In March, the Maryland-based company announced that the drug had met all its primary endpoints in its phase 3 trials.

There's also ResVax, a respiratory syncytial virus (RSV) vaccine for infants that could hit a peak of $2 billion in annual sales. But after failing in its phase 3 trials last year, the drug is more of a long shot, although Novavax hasn't given up on it and is still trying to bring it to market. The company also has an RSV vaccine for adults aged 60-plus that's in phase 2 trials and an RSV vaccine for children that's in phase 1. The only other vaccine in phase 1 is its Ebola virus vaccine candidate. Beyond that, Novavax is also working on three other drugs that are still in preclinical stages, including a vaccine for Middle East Respiratory Syndrome, one for Severe Acute Respiratory Syndrome, and a combined seasonal influenza/RSV vaccine.

Is Novavax's valuation too high?

There's reason to be optimistic about Novavax beyond just its COVID-19 vaccine, especially once the FDA approves Nanoflu, which seems to be just a matter of time given the positive results from its phase 3 study. However, Novavax's market cap of about $7 billion is still more than four times the high end of analysts' expectations for Nanoflu at its peak. In comparison, the average stock in the Health Care Select Sector SPDR Fund trades at just 1.7 times revenue. 

Investors are paying a big premium for Novavax right now, and without a successful COVID-19 vaccine, the stock's valuation is extremely high. If the company gets bad news from its clinical studies and its vaccine candidate fails, Novavax's share price could implode in an instant. Although the pace of Novavax's price increases has cooled in the past three months -- it's up about 9% over that period, the same as the S&P 500 -- there's still lots of room for the stock to fall. Right now, Novavax is a very risky healthcare stock to buy, given its high valuation and its dependence on NVX-CoV2373.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Novavax Stock Quote
Novavax
NVAX
$16.89 (1.50%) $0.25
AstraZeneca PLC Stock Quote
AstraZeneca PLC
AZN
$66.03 (-0.27%) $0.18
Johnson & Johnson Stock Quote
Johnson & Johnson
JNJ
$175.39 (-1.09%) $-1.94
Moderna Inc. Stock Quote
Moderna Inc.
MRNA
$174.71 (-0.39%) $0.68

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
351%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/29/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.