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It's easy to match the overall market return by buying an index fund. While individual stocks can be big winners, plenty more fail to generate satisfactory returns. That downside risk was realized by Spero Therapeutics, Inc. (NASDAQ:SPRO) shareholders over the last year, as the share price declined 15%. That falls noticeably short of the market return of around 7.0%. We wouldn't rush to judgement on Spero Therapeutics because we don't have a long term history to look at. Shareholders have had an even rougher run lately, with the share price down 12% in the last 90 days.
Spero Therapeutics isn't currently profitable, so most analysts would look to revenue growth to get an idea of how fast the underlying business is growing. Generally speaking, companies without profits are expected to grow revenue every year, and at a good clip. That's because it's hard to be confident a company will be sustainable if revenue growth is negligible, and it never makes a profit.
Spero Therapeutics grew its revenue by 252% over the last year. That's well above most other pre-profit companies. Given the revenue growth, the share price drop of 15% seems quite harsh. Our sympathies to shareholders who are now underwater. Prima facie, revenue growth like that should be a good thing, so it's worth checking whether losses have stabilized. Our monkey brains haven't evolved to think exponentially, so humans do tend to underestimate companies that have exponential growth.
The image below shows how earnings and revenue have tracked over time (if you click on the image you can see greater detail).
Take a more thorough look at Spero Therapeutics's financial health with this free report on its balance sheet.
A Different Perspective
While Spero Therapeutics shareholders are down 15% for the year, the market itself is up 7.0%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. With the stock down 12% over the last three months, the market doesn't seem to believe that the company has solved all its problems. Basically, most investors should be wary of buying into a poor-performing stock, unless the business itself has clearly improved. You might want to assess this data-rich visualization of its earnings, revenue and cash flow.
Of course Spero Therapeutics may not be the best stock to buy. So you may wish to see this free collection of growth stocks.
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 firstname.lastname@example.org. 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.