One of the great pleasures of investing is the excitement that comes with the clandestine knowledge of finding an undiscovered bargain. That's doubly true when the bargain is (somehow) for an already-discovered and high-profile business, like BioNTech (BNTX -0.06%). Still, the stock's decline of more than 40% in the last year while selling a globally in-demand coronavirus vaccine should tip investors off that not everything is as it appears.
But, many stocks are declining at the moment, and stocks often fall without any direct underlying development that would harm a company's ability to compete. Is BioNTech a value trap landmine waiting for value-hunters, or is the market getting this one wrong? Let's start to answer this question by defining the concept of a value trap so that we're on the same page.
What are value traps?
In a nutshell, value traps are stocks that appear to be priced at a bargain relative to their current financial performance but are actually just declining businesses that the market is correctly appraising at a low value. Falling for a value trap often means parking your capital somewhere it will decline over time, as the stock becomes a better and better "bargain" the lower its price gets, sometimes in the face of rising revenue or earnings. For new value investors, there's nothing more frustrating, and avoiding such pitfalls is key.
It's easy to see why BioNTech has the whiff of being a value trap. Over the last three years, its shares skyrocketed by more than 1,050%. Since the start of 2021, its quarterly net income grew by 848.8%, reaching more than $4 billion in the most recent quarter. Its trailing 12-month revenue eclipses $27 billion, and it's all thanks to the biotech's work with Pfizer (PFE -0.13%) that resulted in the development of the Comirnaty coronavirus vaccine of which it shares the profits.
In terms of the company's valuation, its trailing price to earnings (P/E) multiple is currently a hair over 3.2. Considering that the biotech industry's average P/E is nearly 21 and that the market's average P/E is close to 24.2, it's clear that the company's recent earnings aren't getting investors to bite and buy the stock. There's more than one reason why that's the case, but the biggest clues are the P/E multiples of Moderna (MRNA 1.13%), which is around 4, and Pfizer which is at near 11.3.
Is BioNTech a trap?
Pfizer is a major pharmaceutical company, and it has six projects which are in the registrational phase of development and on the cusp of generating revenue. Likewise, it has 29 programs in phase 3 clinical trials, meaning that the probability is extremely high that at least a few of those programs will translate into more revenue over the next few years. And that's not even getting into the very reasonable expectation that sales of its recently launched drugs will ramp up their market share and deliver growth.
In contrast, BioNTech has a scant five programs in mid-stage clinical development and none in late-stage development. Moderna has a couple of late-stage projects, but nothing approaching commercialization anytime too soon. Both biotechs only have one product on the market: Their coronavirus jabs.
And now that the global market for doses of coronavirus vaccine is saturated with excess supply and doses are going to waste for lack of demand, expectations of perpetually rising jab sales are increasingly untenable. That's bad news for the pair, and it suggests that both will struggle with falling sales relatively soon.
With the prospect of declining revenue starkly visible on the horizon, BioNTech's low valuation makes complete sense, and it's safe to say that the stock is indeed a value trap, though it isn't among the most dangerous ones that investors might encounter. There's no rule that says the company won't be able to develop new medicines and successfully commercialize them to eventually return to consistent growth, and it definitely has the resources to do so in the long run.
For investors with long timetables and a hankering for steals, BioNTech is priced incredibly cheaply and probably won't be that way forever. Still, it could take a few years before that happens, and the stock could potentially fall even further in that time if vaccine sales drop faster than anticipated, so tread carefully.
