Summit Therapeutics’ stock has surged by an impressive 700% this year.
Stocks that experience rapid growth often reach unsustainable levels driven by investor euphoria. Summit Therapeutics (SMMT) has become one of the most sought-after stocks this year despite the company having no approved products and generating no revenue. Investor optimism is largely fueled by one of its oncology treatments. Following a significant decline from its peak, questions arise concerning whether the stock has reached its zenith or if it could present a buying opportunity.
Its Valuation Driven by a Single Drug
Currently valued at over $16 billion, the future trajectory of this healthcare stock hinges significantly on the success of its cancer drug, ivonescimab. In a late-stage trial for advanced non-small cell lung cancer, ivonescimab significantly outperformed Merck’s Keytruda, triggering a wave of investor optimism. Investors appear to be pricing the drug as a potential blockbuster, potentially rivaling Keytruda, which has been effective in treating various types of cancers. However, ivonescimab has yet to receive approval for any indication, making the high expectations surrounding it precarious and the stock susceptible to significant corrections should any negative news arise.
Stock Volatility and Short Interest Indicators
Assessing the company’s worth at this early stage of development is challenging. The valuation of over $20 billion that Summit previously reached seemed excessive, even with the promising outlook for ivonescimab. The high valuation could limit further stock price increases, which may explain the recent loss of some gains. Reduced trading volume indicates waning hype and cooling bullish sentiment.
When a stock is highly anticipated, trading volumes typically spike. The announcement of positive late-stage trial results for ivonescimab in early September led to a stock surge as many investors sought to incorporate it into their portfolios. Nevertheless, a significant number of investors remain bearish, regarding the stock as overpriced and high-risk, awaiting a potential sell-off. Although there has been a recent decrease in short interest, it remains notably high for Summit, exerting downward pressure on the stock’s valuation as bullish investors step back. This creates volatility as the stock’s performance hinges on ivonescimab’s success and the impact of short-sellers.
Potential Investment in Summit Therapeutics
Summit holds considerable potential, with ivonescimab positioned as a promising drug that could drive long-term growth and substantial valuation if successful. However, the company has not yet reached that stage, and the risk remains that investors are paying a high premium for the stock, even as its price has recently decreased. In the short term, the stock might have peaked.
Unless one is a contrarian investor with a high tolerance for risk, it may be prudent to wait until ivonescimab receives approval and starts generating revenue. If the drug proves successful, there could be significant upside in the future, with no immediate need to rush into purchasing the stock.
Disclosure: David Jagielski holds no positions in any of the mentioned stocks. The Motley Fool has positions in, and recommends, Merck and Summit Therapeutics. The Motley Fool maintains a disclosure policy.
