Quidel (QDEL) is a testing company that's been experiencing tremendous sales growth over the past year, largely because of the popularity of its COVID-19 tests amid the pandemic. But testing volumes are down and there's an uncertain path ahead, so I decided to sell my holdings. There's just too much risk with the stock right now.
Shares are down 17% year to date (while the S&P 500 is up 18%), and it's possible that Quidel's stock could fall even lower before the year is over. Here are the three main reasons I decided to give up on the stock.
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1. The company had no big COVID-related deals heading into earnings
One of the reasons I was bullish on the healthcare stock was the potential for Quidel to play a major role in testing for companies and schools as they open back up. In April, it announced a deal with the San Diego Padres baseball team in which its rapid tests, which can produce results in 15 minutes, would help keep fans and staff safe.
I expected many more deals like this one. After all, in its Q4 2020 earnings call on Feb. 19, management discussed the "significant interest" it was getting from new markets that could drive demand for the business. This included the travel, entertainment, and sports sectors. The Padres deal was a good sign that it was potentially on the right track.
However, since then, Quidel hasn't announced any major COVID-related deals. The lone exception was its press release on July 19 saying it would provide testing services for schools in Delaware.
Given the lack of developments, I'm just not optimistic that there's any testing demand left, or that what remains is as strong as the company expected.
2. Quidel has been volatile, and lackluster demand could lead to another sell-off
Quidel reports earnings in August, and without strong demand, the company could again underwhelm. For the first three months of 2021, Quidel's sales of $375.3 million were up 115% year over year. But analysts were expecting the company to report sales of $465.7 million -- against that target, the results were a miss of more than 19%.
After each of the three prior quarterly reports, the stock has proceeded to sharply fall in price -- with the exception of its most recent earnings report, for which the company issued preliminary revenue numbers beforehand:
That volatility is dangerous, especially amid high valuations. And while Quidel's price-to-earnings ratio of 7 is fairly low (the average holding in the Health Care Select Sector SPDR Fund trades at 27 times its profits), that number can quickly increase after a bad quarter.
In short, there's just too much risk heading into earnings to be holding Quidel right now. And while it has recovered in the past, I'm just not optimistic it will do so this time around.
3. The vaccine rollout has gone more quickly and better than I expected
The biggest factor in Quidel's softer numbers, and the reason I expect a much more challenging road ahead, has to do with how quickly the economic recovery has progressed. More than half of the U.S. population has already received one dose of a COVID-19 vaccine, and among adults, the figure is close to 70%.
While there are concerns about the delta variant, the vaccines are proving to be effective against symptomatic infection. Moderna's vaccine was found to be 72% effective in a recent study, which was after just one dose of the recommended two. Pfizer's two-shot vaccine was 56% effective after a single dose, and Johnson & Johnson reported that its single-shot vaccine was 85% effective in preventing severe disease due to the delta variant.
While there are concerns that case numbers are rising, the data suggests that with high vaccination rates, the new delta variant shouldn't be enough to derail reopenings. And unless that happens, I wouldn't expect much of an increase in testing volumes for Quidel. That's another reason I believe it will be difficult for Quidel to impress investors and beat expectations for the remainder of the year.
There are better options out there for growth investors
Quidel was a really promising growth stock at the start of the year, and the business still has plenty of potential. Now it appears to be focused on testing for Lyme disease, which management notes is on the rise in the country. While that could help soften the blow from a drop in COVID-19 testing numbers, it likely won't be nearly enough to make up the difference.
Investors looking for better growth opportunities will want to focus on businesses that will do well as the economy opens back up. The days of high growth numbers may be long gone for Quidel.
