Should You Buy Novan (NOVN) Stock After the Stock Split?

Trading in Novan (NOVN) stock after the reverse split commenced on May 26. Investors’ initial reaction was bearish with the stock falling as much as 6.5 percent at some point. The sentiment turned bullish and the stock reversed course to rise more than 10 percent in the morning trading. What is Novan's forecast after the stock split?

Novan is a U.S. biotechnology company based in North Carolina. Its lead product candidate called "SB206" is in a Phase 3 clinical study evaluating it as a possible treatment for molluscum contagiosum. 

In July 2020, Novan made a reverse stock split proposal to shareholders at the annual meeting and they endorsed it. The instructions were clear. The company would implement a reverse split at between 1-for-2 and 1-for-15. Novan chose to do a 1-for-10 split. Novan shareholders received one share for every 10 shares held previously. Now, a Novan share carries a higher value than before.

The company wanted to achieve multiple goals with the reverse split. First, the reverse split allows it to maintain compliance with Nasdaq listing requirements. For a stock to continue to be list on Nasdaq, it must maintain a minimum share price of $1. Stocks that fall short of this requirement can be delisted from the exchange. 

With the reverse split, Novan is now out of the penny stocks territory. The board thinks that the stock will become more attractive to big investors. Stocks that are popular with institutional investors tend to draw many other investors.

Also, the reverse split gives Novan more room to issue shares in the future if it needs to raise capital through the equity market. The consolidation has increased the number of authorized but unissued shares.

The outlook for Novan stock is bullish after the split. The consensus target price of $32 implies nearly a 280 percent upside potential to the current price. The high target price of $45 suggests a 400 percent upside.

Novan carries a market cap of more than $1.3 billion after the stock popped up following the reverse split. With the split out of the way, many investors want to know if NOVN stock is undervalued now. Currently, Novan trades at 2021 EV-to-sales of 483x. That shows a more stretched valuation than Ocugen’s 3.9x, Bionano Genomics’ 57x, and Zomedica’s 463x. 

There are several reasons you might like Novan stock after the reverse split. First, the stock doesn't face delisting risk. Maintaining a Nasdaq listing is good for the stock’s exposure to big investors. Also, since Novan isn't a penny stock, it can draw more institutional investors.

The reverse split has removed equity fundraising constraints for Novan. It means that the company can sell more shares to raise more money to accelerate its programs that will generate revenue and bring profits in the future.

The results from the Phase 3 study of Novan’s drug candidate SB206 are expected out by the end of June. If the results turn out to be positive, they could send NOVN stock soaring from the current level. Novan could also become a more attractive buyout candidate after the reverse stock split and with positive study results. 

The reverse split has pumped up Novan's stock price to about $9 from less than $1 recently. With that in mind and considering a potential breakout if the Phase 3 study results for SB206 are positive, investors what to know the best price to enter NOVN stock. 

Buying NOVN stock under $10 looks like a good deal on account of the upside presented by the consensus target price and the anticipated surge of institutional investors in the stock after the reverse split.