Oncolytics Biotech (NasdaqCM:ONCY) has moved into focus after the U.S. FDA granted Fast Track Designation to its lead candidate pelareorep in a combination regimen for second line KRAS mutant metastatic colorectal cancer.

The Fast Track announcement has coincided with a sharp near term move, with a 1 day share price return of 26.99% and 7 day share price return of 22.78% taking Oncolytics Biotech to US$1.06. The 1 year total shareholder return of 38.16% contrasts with weaker 3 and 5 year total shareholder returns. This suggests momentum has recently picked up after a difficult longer period that also included insider buying, a shift toward gastrointestinal cancers, a U.S. aligned Nevada domicile and leadership additions for late stage trials.

If the Fast Track news has you looking more broadly at oncology and related themes, this could be a moment to scan 25 healthcare AI stocks as potential additions to your watchlist.

With the shares at US$1.06 after a sharp move and analysts seeing scope for a higher price, together with an intrinsic value estimate at a sizeable discount, the key question is whether this creates an opening or if expectations already reflect future growth.

DCF valuation points to a very large upside gap

Our SWS DCF model estimates a future cash flow value of $89.25 per share for Oncolytics Biotech, compared with the last close of $1.06, which implies a very large valuation gap. That type of difference means the model is assigning far more value to the company’s potential future cash generation than the market price currently reflects.

The DCF approach projects estimated future cash flows for the business and then discounts them back to today using a required rate of return, so that far off cash flows count less than near term ones. It is a common way to think about what a company might be worth based on its ability to eventually generate cash, rather than on current earnings or short term sentiment.

For a clinical stage biotech such as Oncolytics Biotech, with no meaningful current revenue, reported losses of $35.269m and forecasts that it will remain unprofitable over the next 3 years, a DCF model leans heavily on assumptions about future revenue growth and eventual profitability. In this case, the model is also incorporating forecast revenue growth of around 65% per year, which helps explain why the fair value estimate comes out so far above today’s price even though the company is currently loss making and has a volatile share price history.

Result: DCF fair value of $89.25 (UNDERVALUED)

However, the story still hinges on successful trials and eventual commercialization of pelareorep, and any setbacks there could quickly challenge an optimistic valuation gap.

No contrasting valuation this time

In this case, the main lens is the SWS DCF model, and there is no second method like earnings or sales based multiples that clearly points in a different direction. That leaves you with the same core question: how much conviction do you really have in the long term cash flow story?

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Oncolytics Biotech for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 54 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Build Your Own Oncolytics Biotech Narrative

If you see the story differently or prefer to lean on your own research, you can build and stress test your view in minutes using Do it your way.

A great starting point for your Oncolytics Biotech research is our analysis highlighting 2 key rewards and 4 important warning signs that could impact your investment decision.

Looking for more investment ideas?

If this story has you thinking bigger about your portfolio, now is a good time to scan for other opportunities that fit the kind of risks and rewards you want.

• Target companies that might be priced below their fundamentals by checking our list of 54 high quality undervalued stocks before others catch on.
• Build a core of potential income payers by reviewing the 13 dividend fortresses that could help anchor your returns with higher yields.
• Strengthen your watchlist with financially healthier names by scanning the solid balance sheet and fundamentals stocks screener (44 results) that can sometimes hold up better when conditions get tougher.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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. Simply Wall St has no position in any stocks mentioned.