Sorrento Therapeutics (NASDAQ:SRNE) stock fell sharply in late October. But, in recent weeks, shares in the biotech company and fading Covid-19 play have started to bounce back. Up more than 38.7% since Nov. 9, investor interest in SRNE stock is starting to pick up once again.
So, should you hop on the bandwagon? Not so fast. Sure, even as its pandemic catalysts are still largely long-shots, there’s a bull case to be made for SRNE. However, after the stock’s recent strong performance, the risk-return proposition doesn’t look to be in your favor.
Of course, shares could keep climbing on just a breadcrumb of positive news. But, if the company falls short of its high expectations, shares will likely crater. How far? I could easily see Sorrento Therapeutics fall back towards its pre-pandemic prices at around $3 per share.
Add in the continued valuation and dilution concerns and it appears that your best move is to sit on the sidelines. In terms of a buying opportunity, look elsewhere.
SRNE Stock and the DARPA Deal
As I discussed in my last article on Sorrento Therapeutics, the interest with SRNE stock is with its Covid-19 catalysts. I’m talking about its COVI-GUARD and COVI-AMG treatments, along with its testing products like COVI-TRACE and COVI-TRACK.
With therapies from larger rivals like Regeneron (NASDAQ:REGN) and Gilead (NASDAQ:GILD) garnering much more of the spotlight, though, it’s no shock that investors started to lose faith in SRNE’s pipeline.
Yet, we may be starting to see the company’s move towards Covid-19 therapies pay off. Late last month, the biotech’s SmartPharm unit inked a deal with DARPA (Defense Advanced Research Projects Agency) to develop a “rapid countermeasure against Covid-19.”
While the $34 million contract doesn’t singularly change the game for SRNE stock, it could be a sign that things are looking up for this fading novel coronavirus play. If subsequent developments come out in the next few months, it’s easy to imagine shares bouncing back. That means SRNE could end closer to prior price levels of nearly $20 per share.
But, while this may mean more upside in the cards, it’s far from guaranteed. And, given that two major concerns remain on the table, buying into the recent rally may not be the best move.
Valuation and Dilution Remain Top Concerns
With the DARPA contract news, things may be looking up again for Sorrento Therapeutics. Yet, two major issues — valuation and dilution — remain firmly on the table.
Regarding valuation, the company sports a market capitalization of almost $2.1 billion, which — compared to trailing 12-month sales of $41.5 million — looks rich.
Granted, this number isn’t completely out of line. If the company strikes gold with one of its Covid-19 candidates, today’s valuation may look completely reasonable in hindsight. But, with investors already pricing in so much of its potential, further upside may be more limited than you think.
Related to limited upside is another major concern, dilution. InvestorPlace’s Mark Hake recently broke down the issue with the company’s dependence on equity raises. Burning through cash at a rapid clip, Sorrento needs these share sales to keep the lights on.
Now sure, so far this year, dilution hasn’t had much of an impact on SRNE stock’s price per share. Investors have been willing to cut it some slack. Over the long-term, though, this heavy dilution could catch up with the company.
In other words, if SRNE brings a Covid-related product to market, the dilution factor — along with its already-high valuation — may minimize how far shares climb from here. Couple that with the downside risk of if the company fails to succeed, and it’s clear that the risk-return isn’t really in your favor. That’s true even as enthusiasm re-enters this stock.
However, there is another factor that could boost shares in the near-term. SRNE continues to be heavily shorted by bearish investors, with 28.7% of outstanding shares sold short. Yet, while this factor could help send shares soaring if more positive news hits the wires — I wouldn’t go long on the short squeeze factor alone.
There Are Better Biotech Plays Out There
I’ll admit, there is some potential here with Sorrento Therapeutics. While it hasn’t hit success just yet, recent developments could be a sign that something big is around the corner. However, with speculation commanding price action, this pick is decidedly more of a gamble than an investment. Unable to predict the unpredictable, going long or short isn’t much of an option.
So, what does that mean? You should avoid chasing the rebound in SRNE stock. Yes, shares have the potential of climbing back to double-digits in the near-term on a crumb of positive news. But, with massive potential downside if the company falls short, the risk is just not worth it.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.