One of the simplest tricks to being a good investor is stopping to take a breath before purchasing a stock. Pausing for a moment defuses the tension that often leads to impulsive (and potentially disastrous) buying, and it also forces you to weigh the arguments surrounding your action. That's an excellent habit to get into, even if you're thinking of procuring a stock that many people are rightfully bullish on, like vaccine developer Moderna (MRNA -4.97%).
Moderna's victory with its recently approved coronavirus vaccine will safely carry the company through the next few years, and it will likely enrich its investors along the way. Nonetheless, people thinking of investing in Moderna in the near future need to understand its upcoming challenges before they proceed.
1. COVID-19 vaccine revenue might not last forever
In the last quarter of 2020, Moderna made $571 million in revenue, $200 million of which came from coronavirus vaccine sales, with government grants and drug development collaborations making up the rest. In 2021, based on its advance purchase agreements, it expects to make $18.4 billion.
As delightful as that estimate sounds to shareholders', it isn't reasonable to expect that revenue to be perpetually recurring in full. The market for coronavirus vaccines is quickly becoming more crowded as new candidates are approved by regulators, meaning that in future years there will be more competition for market share.
Furthermore, it's unclear how long Moderna's vaccine -- or any other company's -- protects against the virus. Management expects immunity to last for at least a year, but it could be even longer. After that, people might need booster shots to top off their immunity, which would be favorable for the company. But, if vaccine-induced protection is extremely long-lasting, it might take much longer for revenue to recur.
In short, Moderna needs new pipeline candidates to be the drivers of long-term growth, and it might not eclipse its 2021 revenue for years.
2. It hasn't ever reported any positive earnings
As impressive as Moderna's meteoric rise has been, it hasn't had a single profitable quarter so far. That includes the most recent quarter, when it reported a net loss of $272 million despite bringing in record revenue. While it's true that its soon-to-be colossal revenue will likely remedy its unprofitability quite rapidly, there could be a fly in the ointment.
Understandably, the company's expenses have ballooned during its all-out effort to get its coronavirus vaccine out the door. Its cost of sales was only $8 million in the last quarter of 2020, but that will likely explode during its mass-scale manufacturing push throughout this year. The same goes for its selling, general, and administrative (SG&A) expenses, which in the fourth quarter were more than triple compared to 2019. Likewise, research and development (R&D) costs will remain much higher than before due to ongoing pipeline development efforts.
Thanks to the expected vaccine revenue, the expenses themselves aren't as big of a concern for investors compared to the market's earnings expectations. It's entirely possible that Moderna could report strong profitability next quarter and still experience a contraction in its stock if it falls short of sky-high estimates. Because it doesn't have a history of profitability to lean on, the uncertainty is higher than it would be otherwise, making it riskier to invest right now.
3. You may need to wait a couple of years to see significant returns
It's a tautology to say that the trouble with buying explosively growing stocks is that they've already grown explosively, but it's true. Investors who approach Moderna's stock today with the idea that it will do a repeat of its 2020 performance will be disappointed. The market has already priced in its victory in the coronavirus vaccine race, and in all probability 2021's expected bounty is largely priced in too.
Moving forward, there are a couple of sources that will deliver reliable growth for investors: better-than-expected earnings, and new information on the performance, progress, or initiation of its pipeline programs. If 2021 goes exactly according to management's estimates, the stock might not expand by that much even as the company makes oodles of money. Thus, investors should be ready to hold on until at least the three-year horizon, when there will have been enough new information to drive prices up.
Is Moderna still a buy?
Regardless of the three issues I've raised here, I think that Moderna will become one of the world's most dominant biopharma companies over the next decade. As shown by the rapid development of a highly effective coronavirus jab, mRNA vaccine technology is a game-changer that will help the world tackle some of its most pressing health issues.
Coronavirus vaccine revenue can be replaced by other sources in the long run, assuming that people don't need frequent booster shots. Similarly, profitability is something that Moderna can afford to put off for quite some time before it risks becoming a drag on stock price. Finally, the fact that new investors may need to wait for their purchase to pay off is just a fact of life when it comes to hyped-up companies.
Considering that the stock is still a bit off of its all-time high, now is probably a good time to invest. But, if stopping to take a breath before taking the plunge has cooled your desire to buy it now, don't be afraid to wait a few months for a better price point.