Over the past six months, Novavax has been a great trade, beating the S&P 500 by 17.7%. Its stock price has climbed to $10.87, representing a healthy 25.4% increase. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Novavax, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think Novavax Will Underperform?
Despite the momentum, we’re sitting this one out for now. Here are three reasons we avoid NVAX, plus one stock we’d rather own.
1. Revenue Spiraling Downwards
Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Novavax struggled to consistently generate demand over the last five years as its sales dropped at a 18.9% annual rate. This was below our standards and is a sign of poor business quality.
2. Shrinking Adjusted Operating Margin
Adjusted operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses — everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies because it excludes non-recurring expenses, interest on debt, and taxes.
Looking at the trend in its profitability, Novavax’s adjusted operating margin decreased by 26.9 percentage points over the last two years. Novavax’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its adjusted operating margin for the trailing 12 months was negative 56.6%.
3. Cash Burn Ignites Concerns
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Novavax’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 42%, meaning it lit $42.00 of cash on fire for every $100 in revenue.
Final Judgment
We cheer for all companies helping people live better, but in the case of Novavax, we’ll be cheering from the sidelines. With its shares outperforming the market lately, the stock trades at $10.87 per share (or a forward price-to-sales ratio of 7.4×). The market typically values companies like Novavax based on their anticipated profits for the next 12 months, but there aren’t enough published estimates to arrive at a reliable number. You should avoid this stock for now - better opportunities lie elsewhere. We’d suggest looking at the most entrenched endpoint security platform on the market.
Stocks We Like More Than Novavax
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