Throughout most of 2020 and 2021, it seemed as if Moderna (NASDAQ:MRNA) could do no wrong. The company won multiple supply deals for its COVID-19 vaccine. Moderna’s revenue and profits skyrocketed. And so did its share price.

The last couple of months have been much different. There’s been plenty of bad news for Moderna. Most of the summer’s gains have evaporated. However, this major pullback has prompted some investors to wonder if the vaccine stock has fallen more than is warranted. Is Moderna stock a buy after plunging more than 35%?

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Behind the decline

Anytime a stock drops precipitously, the most important step for investors is to understand the reasons behind the decline. In Moderna’s case, there are at least three primary factors at work.

Arguably the biggest reason for the stock sinking over the last two months is that investors worried that Moderna’s valuation got out of hand. At one point, Moderna’s market cap approached $200 billion. That level is much higher than several other drugmakers with more revenue and many more products on the market than Moderna.

A second cause for Moderna’s shares falling relates to safety concerns. In August, the European Medicines Agency began investigating potential adverse side effects reported in individuals receiving Moderna’s COVID-19 vaccine.

Last week, four European countries suspended or discouraged the use of the vaccine in some younger individuals. These actions were taken after a study conducted by Sweden’s health agency linked Moderna’s vaccine to rare heart inflammation issues that occur primarily in younger men.

Some investors also panicked after Merck and Ridgeback Biotherapeutics reported positive results from a late-stage study of a COVID-19 pill. The thought was that vaccine sales could be negatively impacted if a safe, effective, and convenient pill becomes available that can significantly reduce the likelihood of developing severe COVID-19.

Looking on the bright side

There’s a pretty good argument to be made that the sell-off of Moderna stock was overdone in most of those cases. For example, the safety issues associated with the company’s COVID-19 vaccine aren’t likely to hurt Moderna very much financially. The issues are very rare. More importantly, Moderna already has major supply deals in place for 2022 and beyond.

Merck’s COVID-19 pill shouldn’t matter all that much to Moderna’s prospects, either. Governments around the world are highly unlikely to reduce their vaccination efforts just because an oral COVID-19 therapy is available (assuming Merck wins authorizations for its antiviral pill.)

As for valuation concerns, Moderna’s long-term opportunities remain as compelling now as they were when its stock was setting record highs. The company continues to anticipate that COVID-19 boosters will be needed, likely on an annual basis. Moderna is still a leader in developing new vaccines that target specific coronavirus variants.

The company’s pipeline is even stronger than ever. Moderna plans to soon advance its cytomegalovirus vaccine into late-stage testing. The company’s respiratory syncytial virus (RSV) vaccine should move into phase 2/3 clinical studies soon. It’s testing a messenger RNA (mRNA) flu vaccine — a key step toward achieving the goal of developing a combination COVID-19/flu vaccine.

Two takes

I have two takes on Moderna. On the one hand, I think the company’s mRNA platform could lead to multiple blockbuster vaccines and therapies over the coming years. I also believe there’s a pretty good chance that Moderna will be able to generate strong recurring revenue from its COVID-19 vaccine for years to come.

On the other hand, I agree with those who feel that Moderna’s valuation rose too much too quickly. I didn’t have a big problem when the company’s market cap stood at $70 billion or even $80 billion. However, even after the recent decline, my view is that Moderna is still valued too high considering the uncertainty about how often COVID-19 boosters might be needed in the future.

I continue to like Moderna the company. But I’ll remain on the sidelines for now with Moderna the stock.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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