This isn't an April Fools' Day joke. Moderna (MRNA 0.46%) could be viewed as a value stock. Seriously.
I know what you're probably thinking: How can a stock with a market cap of over $51 billion with sales of only around $800 million last year even remotely qualify as a bargain? You might be surprised to learn how strong the case for Moderna as a value stock is.
Hello, low multiple
The S&P 500 currently trades at 21.6 times expected earnings. The S&P 500 healthcare sector trades at nearly 16 times expected earnings. Biotech stocks in the S&P 500 sport an average forward price-to-earnings multiple of a little under 11.
Now for how Moderna compares. Make sure you're sitting down. The biotech's shares trade at 7.3 times expected earnings. That's right: Moderna's valuation is 66% cheaper than the S&P 500. It's nearly 32% cheaper than S&P biotech members.
So is Moderna a value stock? Most definitions of the term will say something along the lines that a stock is a value stock when its shares are priced well below its peers based on a commonly used valuation metric. Based on its forward earnings multiple (which is without question a commonly used valuation metric), Moderna certainly appears to be a value stock.
It's possible that the earnings estimates used with Moderna's low forward earnings multiple are off. I don't think that's the case, however. Moderna should easily be able to meet analysts' estimates with sales for COVID-19 vaccine mRNA-1273 taking off.
One potential problem
Why aren't more investors rushing to buy Moderna with its stock seemingly so inexpensive? There's one potential problem that's keeping some on the sidelines: No one knows how resilient sales for mRNA-1273 will be.
For one thing, it's uncertain at this point what the duration of protection against SARS-CoV-2 will be for Moderna's vaccine. Also, accurately predicting what vaccination rates might be after the pandemic ends isn't an easy task. Because of these issues, it's quite possible that Moderna's forward earnings multiple won't remain low for very long.
Even if annual revaccination is required, Moderna's earnings could still decline over the next few years. While two doses of mRNA-1273 are needed today, future booster shots might require only one dose. There could also be increased competition and even a supply glut of COVID-19 vaccines down the road.
Of course, there's also a real possibility that the biotech will be able to generate strong earnings for years to come. The emergence of new coronavirus variants could make that scenario more likely. For now, though, we just don't know what will happen. And that makes Moderna's status as a value stock precarious.
Going farther forward
Those forward earnings multiples mentioned earlier only go out one year. That's understandable since it's difficult to project how a company might perform several years into the future. Some still take a stab at it, though.
Oppenheimer analyst Hartaj Singh thinks that Moderna's market cap could reach or even top $100 billion within the next five to seven years. That's close to twice the company's current market cap. Strong recurring sales of mRNA-1273 are a key ingredient to this prediction. Moderna would also need some help from its pipeline.
These pre-requisites might not be too much of a stretch for Moderna. The company could be able to count on substantial annual revenue for mRNA-1273, especially if the novel coronavirus continues to mutate at a rapid pace. Its cytomegalovirus (CMV) vaccine advances into late-stage testing this year and could potentially be a mega-blockbuster if approved. Moderna has also launched a promising flu vaccine program that could lead to commercial success within a few years.
Value stocks at their core are simply stocks that are really worth significantly more than where they're currently priced. Believe it or not, Moderna could actually be a value stock.