Index additions put Olema Pharmaceuticals in front of more institutional investors

Olema Pharmaceuticals (OLMA) has just been added to several Russell growth benchmarks, a change that puts the stock in front of more index-tracking and institutional investors that follow these indices.

At a share price of $12.64, Olema Pharmaceuticals has seen short term momentum build, with a 1 month share price return of 18.24% and a 7 day move of 10.59%, even though the 90 day share price return is down 16.07% and the year to date share price return is down 50.00%. The 1 year total shareholder return stands at 176.59% and the 3 year total shareholder return at 39.98%, indicating a mix of recent volatility and stronger gains over a longer window that may help explain why broader index inclusion has attracted fresh attention.

If the index additions have you thinking more broadly about opportunities in healthcare related growth stories, it could be worth scanning 40 healthcare AI stocks for ideas that fit a similar high research and development profile.

So with Olema Pharmaceuticals trading at $12.64, carrying no reported revenue and a recent mix of sharp gains and pullbacks, is the current price leaving meaningful upside on the table or already reflecting investors’ expectations for future growth?

DCF signals a wide gap between Olema Pharmaceuticals’ price and cash flow estimate

On Simply Wall St’s DCF model, Olema Pharmaceuticals has an estimated future cash flow value of $212.47 per share, compared with the recent share price of $12.64. This points to a very large gap between the market price and that model output.

The SWS DCF model works by projecting a company’s potential future cash flows and then discounting those back to today using an assumed required rate of return. The result is a single estimate of what those future cash flows could be worth in today’s dollars.

For a clinical stage biopharmaceutical company like Olema Pharmaceuticals, this type of model leans heavily on assumptions about the timing, size and probability of future cash flows from drugs that are still in trials, because the company currently reports no revenue and a loss of $185.151m. That makes the DCF output especially sensitive to inputs around future revenue build up and margins, which can shift as trial outcomes and funding plans evolve.

Result: DCF Fair value of $212.47 (UNDERVALUED)

However, Olema Pharmaceuticals still faces key risks, including clinical trial setbacks for palazestrant or OP-3136, as well as the need to fund operations while reporting no revenue and a sizeable loss.

Another view on Olema Pharmaceuticals’ valuation

While the SWS DCF model suggests a very large gap between Olema Pharmaceuticals’ estimated future cash flow value and its current $12.64 share price, a simpler check using the P/B ratio points in the same direction but with a different tone. OLMA trades at 2.3x book value versus 2.7x for the wider US biotech industry and 9.2x for peers on average, which means the stock is priced below both groups on this metric and carries a value score of 4 out of 6. This raises the question of whether investors are being cautious about its lack of revenue or overlooking its pipeline.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Olema Pharmaceuticals 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 42 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Next Steps

With Olema Pharmaceuticals showing both potential rewards and clear risks, it is worth taking a closer look at the underlying data and recent developments yourself. To see how the upside and downside stack up in one place, review the 2 key rewards and 3 important warning signs.

Looking for more ideas beyond Olema Pharmaceuticals?

If Olema Pharmaceuticals has sharpened your focus on where risk and reward meet, do not stop here. Broaden your watchlist with other focused stock ideas.

• Target resilient income by reviewing companies in the 7 dividend fortresses that may better balance yield and stability in your portfolio.
• Spot potential mispricing quickly by scanning the screener containing 18 high quality undiscovered gems before they attract wider attention from other investors.
• Prioritise capital preservation by filtering for companies in the 75 resilient stocks with low risk scores that align with a more cautious risk profile.

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.