Few stocks are as hot as Moderna (MRNA 5.35%) is right now. The vaccine maker's shares have soared more than 360% so far this year. And that comes on top of the 434% gain in 2020.
That kind of performance tends to attract investors' attention -- and deservedly so. Some might view the vaccine stock as overpriced now that its market cap tops $190 billion. But not everyone.
There's one investor preparing to make a $1 billion bet on Moderna. Who is it? None other than Moderna itself.
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Investing heavily
Moderna stated in its second-quarter update that its board of directors authorized a share repurchase program of up to $1 billion. Don't expect the company to spend all that money at one time, though. The authorized funds can be used over a two-year period to buy back shares.
Actually, Moderna has invested and will invest a lot more than just $1 billion in its business. CFO David Meline noted in the company's Q2 conference call that Moderna more than tripled its research and development spending year over year in the first half of 2021. He said to expect significantly increased R&D investments going forward.
In addition, Moderna plans to make between $450 million and $550 million this year in capital investments. These investments include a major expansion of capacity to be able to manufacture up to 3 billion doses of its COVID-19 vaccine in 2022. The company is also investing in technology improvements and beefing up its global commercial operations.
Why buy back shares?
Probably the most important reason why Moderna is preparing to invest so much in itself is that the company's management team is very confident in its business prospects. CEO Stéphane Bancel said in the Q2 call, "We are very optimistic about the future of Moderna and we are just getting started."
Another reason why Moderna is ready to spend up to $1 billion in stock buybacks is that it's likely going to have more cash than it knows what to do with. The company ended the second quarter with a cash stockpile of $12.2 billion. That amount will almost certainly continue to grow.
Moderna expects to rake in $20 billion in sales from its COVID-19 vaccine this year. It already has advance purchase agreements worth $12 billion plus another $8 billion in options for next year.
Repurchasing shares is actually Moderna's third investment priority. The company first wants to reinvest in its base business, which includes the aforementioned increased R&D and capital spending. Moderna also is interested in expanding its pipeline through business development, deals including licensing and acquisitions.
Moderna's board seems to think that the company will still have plenty of money left over after investing in those two top priorities. Based on the company's revenue projections, it should easily be able to spare $1 billion for stock buybacks.
A good bet?
Just because Moderna can spend $1 billion on share repurchases doesn't mean that it should do so. I don't think Moderna should make that $1 billion bet in buying back shares. My view is that stock buybacks at Moderna's current valuation (or anywhere close to it) would be ill-advised.
Of course, Moderna could wait to buy back shares only on pullbacks. However, unless its shares plunge significantly, I think that Moderna would better serve its shareholders by making a strategic acquisition with the $1 billion than buying its own richly priced shares.
The company needs to be able to generate growth after the worst of the pandemic ends. With only one non-COVID-19 pipeline candidate soon to enter late-stage testing, buying a smaller biotech is the easiest way to achieve that growth.
