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Did Changing Sentiment Drive Datasea's (NASDAQ:DTSS) Share Price Down A Painful 92%?

Simply Wall St

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The art and science of stock market investing requires a tolerance for losing money on some of the shares you buy. But serious investors should think long and hard about avoiding extreme losses. It must have been painful to be a Datasea Inc. (NASDAQ:DTSS) shareholder over the last year, since the stock price plummeted 92% in that time. That'd be enough to make even the strongest stomachs churn. Notably, shareholders had a tough run over the longer term, too, with a drop of 80% in the last three years. The falls have accelerated recently, with the share price down 45% in the last three months.

While a drop like that is definitely a body blow, money isn't as important as health and happiness.

Check out our latest analysis for Datasea

Datasea hasn't yet reported any revenue yet, so it's as much a business idea as an actual business. This state of affairs suggests that venture capitalists won't provide funds on attractive terms. As a result, we think it's unlikely shareholders are paying much attention to current revenue, but rather speculating on growth in the years to come. It seems likely some shareholders believe that Datasea will significantly advance the business plan before too long.

Companies that lack both meaningful revenue and profits are usually considered high risk. 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 companies like this go on to deliver on their plan, making good money for shareholders, many end in painful losses and eventual de-listing. Some Datasea investors have already had a taste of the bitterness stocks like this can leave in the mouth.

When it last reported its balance sheet in March 2019, Datasea could boast a strong position, with cash in excess of all liabilities of US$5.2m. That allows management to focus on growing the business, and not worry too much about raising capital. But since the share price has dropped 92% in the last year, it seems like the market might have been over-excited previously. The image below shows how Datasea's balance sheet has changed over time; if you want to see the precise values, simply click on the image. You can see in the image below, how Datasea's cash levels have changed over time (click to see the values).

NasdaqCM:DTSS Historical Debt, July 11th 2019

It can be extremely risky to invest in a company that doesn't even have revenue. There's no way to know its value easily. Given that situation, would you be concerned if it turned out insiders were relentlessly selling stock? It would bother me, that's for sure. It costs nothing but a moment of your time to see if we are picking up on any insider selling.

A Different Perspective

The last twelve months weren't great for Datasea shares, which cost holders 92%, while the market was up about 7.0%. Of course the long term matters more than the short term, and even great stocks will sometimes have a poor year. Shareholders have lost 42% per year over the last three years, so the share price drop has become steeper, over the last year; a potential symptom of as yet unsolved challenges. We would be wary of buying into a company with unsolved problems, although some investors will buy into struggling stocks if they believe the price is sufficiently attractive. You might want to assess this data-rich visualization of its earnings, revenue and cash flow.

But note: Datasea may not be the best stock to buy. So take a peek at this free list of interesting companies with past earnings growth (and further growth forecast).

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US exchanges.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.