Chembio Diagnostics Stock Up 159% – Time to Buy CEMI Stock?

The price of Chembio Diagnostics stock jumped more than 159% during yesterday’s session after the company announced that it received a $28.3 million purchase order from a Brazilian company for the purchase of a lot of the firm’s SARS-CoV antigen tests as part of the Brazilian government’s effort to fight the spread of the virus.

The tests will be delivered in 2021 and the order should have a material effect on the firm’s revenues for the year, which is why the stock price has reacted so dramatically to the development.

That said, is this single-day uptick justified based on the firm’s historical performance and growth prospects? The following article takes a closer look at the fundamentals of this biotech company to see if this news could have a long-lasting impact on the share price or if this is a short-lived frenzy that could end up hitting the skids in the following sessions.

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Chembio Diagnostics Stock – Technical Analysis

Yesterday’s sharp rise in the price of CEMI stock has led to a full-blown reversal of its former downtrend, even though the price settled below the stock’s early April high of $5.6 per share to end the day at $5.3.

Meanwhile, the stock is down 12% so far today at $4.70 per share as long-term holders, insiders, and traders who benefitted from entering a long position early might be taking some profits off the table already.

Yesterday’s candle wasn’t too bullish as the price retreated 23% from an intraday high of $6.95 per share. In this regard, the company’s fundamentals might be playing the most important role in shaping the future price action of Chembio as the stock’s short float is not as high (7.5%) as to point to a short-squeeze scenario.

Based on the stock’s historical volumes, it would only take short sellers around two to three days to cover their positions based on the usual daily volumes.

For now, the technical short-term outlook seems bearish while more information on CEMI’s outlook would probably be derived from a fundamental analysis of the business.

Chembio Diagnostics Stock – Fundamental Analysis

Chembio Diagnostics is a company that specializes in the development and production of diagnostic tests for multiple diseases. In February last year, the company started developing COVID-19 diagnostics including serological and antigen tests.

To develop these tests, the company received around $13.3 million from the US Biomedical Advanced Research and Development Authority, also known as BARDA, while the firm’s DPP rapid test for COVID-19 has already been approved for commercial use by the Food and Drug Administration (FDA).

Prior to this order from the Brazilian government, the firm had been reporting revenues from the sale of diagnostics tests of around $20 million in the past three years along with R&D revenues and grant income. In total, the company has been reporting total revenues of $32 million on average.

Latin America has been the largest geographical sales segment for CEMI in past years, which explains why it might have been able to secure this order from the Brazilian government. However, other regions are also important for the company including Europe, Africa, and the United States.

The company holds patents for its DPP technology in multiple corners of the world and has been able to secure international approval for many of its tests for diseases including Dengue, Syphilis, Ebola, HIV, Zika, and Chikungunya. Additionally, some of its HIV and Zika tests have also been granted approval to be commercialized and used in the United States.

The firm is still struggling to profit from its operations and its products had been sold at thin margins in the past. However, during the first quarter of 2021, CEMI’s gross margins expanded, reporting gross profits of $476,000 on its product revenues yet still ending the period with a $4.5 million net loss.

This order from the Brazilian government could ramp up the firm’s top-line results for the year to around $60 million but it is still uncertain if CEMI will be able to secure other orders of this size from this client or from any other for that matter.

That said, this order could give the company an unexpected cash inflow that could be used to trim a portion of its long-term debt assuming that it can generate a gross profit from the tests.

By the end of the first quarter of 2021, CEMI had $25 million in long-term commitments on assets of $57.4 million including $9.1 million in goodwill and $14.4 million in cash. Last year, the company burned around $23 million in cash as a result of its money-losing operations.

Last year, the company raised around $28.4 million by offering 2.62 million shares at an average price of $10.8 per share and it may need to raise more money this year to remain solvent.

At a market capitalization of $90.5 million, CEMI seems to be being valued at 1.5 times this year’s estimated revenues – including the proceeds from the deal with the Brazilian government. At this point, only the value of the firm’s patents and developed products would be supporting the valuation as the fundamentals of the company are fairly poor.

Establishing the value of those components is fairly complicated, yet, at first glance, the valuation might be fair based on the fact that the DPP technology has proven that it has commercial value.

At best, CEMI’s technology might be fairly valued at the moment based on the revenue-generation capacity of its DPP tests.

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