It is doubtless a positive to see that the Ardelyx, Inc. (NASDAQ:ARDX) share price has gained some 93% in the last three months. But that doesn't change the fact that the returns over the last half decade have been stomach churning. Like a ship taking on water, the share price has sunk 73% in that time. The recent bounce might mean the long decline is over, but we are not confident. The million dollar question is whether the company can justify a long term recovery.
We don't think Ardelyx's revenue of US$275,000 is enough to establish significant demand. This state of affairs suggests that venture capitalists won't provide funds on attractive terms. So it seems that the investors focused more on what could be, than paying attention to the current revenues (or lack thereof). For example, they may be hoping that Ardelyx comes up with a great new product, before it runs out of money.
As a general rule, if a company doesn't have much revenue, and it loses money, then it is a high risk investment. There is usually a significant chance that they will need more money for business development, putting them at the mercy of capital markets. So the share price itself impacts the value of the shares (as it determines the cost of capital). While some such companies go on to make revenue, profits, and generate value, others get hyped up by hopeful naifs before eventually going bankrupt. Some Ardelyx investors have already had a taste of the bitterness stocks like this can leave in the mouth.
When it reported in June 2019 Ardelyx had minimal cash in excess of all liabilities consider its expenditure: just US$55m to be specific. So if it hasn't remedied the situation already, it will almost certainly have to raise more capital soon. With that in mind, you can understand why the share price dropped 23% per year, over 5 years . You can click on the image below to see (in greater detail) how Ardelyx's cash levels have changed over time. The image below shows how Ardelyx's balance sheet has changed over time; if you want to see the precise values, simply click on the image.
Of course, the truth is that it is hard to value companies without much revenue or profit. What if insiders are ditching the stock hand over fist? It would bother me, that's for sure. You can click here to see if there are insiders selling.
A Different Perspective
It's good to see that Ardelyx has rewarded shareholders with a total shareholder return of 22% in the last twelve months. That certainly beats the loss of about 23% per year over the last half decade. The long term loss makes us cautious, but the short term TSR gain certainly hints at a brighter future. If you would like to research Ardelyx in more detail then you might want to take a look at whether insiders have been buying or selling shares in the company.
We will like Ardelyx better if we see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US exchanges.
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