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While the Covid19 Pandemic disrupted whole economies worldwide, it sparked a race to develop an effective vaccine on a scale not seen ever before. Moderna, Inc. ( NASDAQ: MRNA ) is one of the companies that developed mRNA-1273, a 94.1% effective vaccine .
It reflected on the stock price with a gain of 44% in the last thirty days and the annual gain of 202%.
Since its price has surged higher, Moderna may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 188.3x, since almost half of all companies in the United States have P/E ratios under 18x and even P/E's lower than 10x are not unusual. Yet, even with some pullback likely to happen after a parabolic run, this kind of move in the market mandates a further investigation.
Just days ago, S&P announced that Moderna would be added to the S&P Index . This resulted in a surge that took the market cap over US$100b. When a stock is added to such an important market index, it means that exchange-traded funds, mutual funds, and other passive investment providers must add the stock to their portfolios. In the index, Moderna will replace another drug maker, Alexion Pharmaceuticals, who is undergoing an AstraZeneca acquisition .
Recent times haven't been advantageous for Moderna as its earnings have been rising slower than most other companies. One possibility is that the P/E is high because investors think this lackluster earnings performance will improve due to the vaccination trends in the world. You'd hope so; otherwise, you're paying a pretty hefty price for no particular reason.
NasdaqGS: MRNA Price Based on Past Earnings July 19th, 2021
Is Vaccination Enough For Moderna?
The only time you'd be genuinely comfortable seeing a P/E as steep as Moderna's is when the company's growth is on track to outshine the market decidedly.
If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago. Yet, the COVID19 virus still looms over the civilization, and the vaccination production keeps chugging along. With the vaccine offering just 6-month protection, the company could keep selling millions of doses repeatedly, as long as the virus remains a threat worldwide.
Turning to the outlook, the next three years should generate growth of 33% per annum as estimated by the analysts watching the company. That's shaping up to be materially higher than the 14% per annum growth forecast for the broader market.
In light of this, it's understandable that Moderna's P/E sits above most other companies. Shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Bottom Line On Moderna's P/E
Moderna's P/E is flying high, just like its stock has during the last month. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
As we suspected, our examination of Moderna's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage, investors feel the potential for a deterioration in earnings isn't significant enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide vital support to the share price.
An S&P500 inclusion gave a massive wind into the sails as passive investors must buy the stock at any price. Another reason is that, compared to the competitors like AstraZeneca and Johnson&Johnson, Moderna has been able to avoid any scandals and keeps on track to produce between 800M to 1B doses in 2021 .
Before you settle on your opinion, we've discovered 3 warning signs for Moderna (1 shouldn't be ignored!) that you should be aware of.
It's essential to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).
Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.