Zai Lab Limited (NASDAQ:ZLAB), a $1.19B small-cap, is a healthcare company operating in an industry, which has experienced tailwinds from issues such as higher demand driven by an aging population and the increasing prevalence of diseases and comorbidities. The demand for new drug development to meet new or persistent chronic illnesses, as well as the ongoing need for biotech drugs as Baby Boomers continue to age, are growth drivers for the optimistic outlook for the biotech industry in the long run. Healthcare analysts are forecasting for the entire industry, a fairly unexciting growth rate of 1.58% in the upcoming year , and a whopping growth of 39.93% over the next couple of years. Not surprisingly, this rate is more than double the growth rate of the US stock market as a whole. Should your portfolio be overweight in the biotech sector at the moment? Below, I will examine the sector growth prospects, and also determine whether Zai Lab is a laggard or leader relative to its healthcare sector peers. Check out our latest analysis for Zai Lab
What’s the catalyst for Zai Lab’s sector growth?
Data analytics and other technology-enabled approaches are creating opportunities for innovations, however, stakeholders have been challenged to keep abreast of this structural shift while under pressure to cut costs. In the past year, the industry delivered growth in the teens, beating the US market growth of 10.58%. Zai Lab lags the pack with its negative growth rate of -63.80% over the past year, which indicates the company will be growing at a slower pace than its biotech peers. However, the future seems brighter, as analysts expect an industry-beating growth rate of 77.69% in the upcoming year. This future growth may make Zai Lab a more expensive stock relative to its peers.
Is Zai Lab and the sector relatively cheap?
The biotech sector’s PE is currently hovering around 27x, above the broader US stock market PE of 20.1x. This means the industry, on average, is relatively overvalued compared to the wider market. However, the industry did return a higher 16.12% compared to the market’s 10.47%, which may be indicative of past tailwinds. Since Zai Lab’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge Zai Lab’s value is to assume the stock should be relatively in-line with its industry.
Next Steps:Zai Lab’s industry-beating future is a positive for investors. If Zai Lab has been on your watchlist for a while, now may be the time to enter into the stock, if you like its growth prospects and are not highly concentrated in the biotech industry. However, before you make a decision on the stock, I suggest you look at Zai Lab’s fundamentals in order to build a holistic investment thesis.
- 1. Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
- 2. Historical Track Record: What has ZLAB’s performance been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Zai Lab? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!