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Did You Manage To Avoid BrainChip Holdings's (ASX:BRN) Devastating 78% Share Price Drop?

Simply Wall St

BrainChip Holdings Limited (ASX:BRN) shareholders should be happy to see the share price up 25% in the last month. But only the myopic could ignore the astounding decline over three years. Indeed, the share price is down a whopping 78% in the last three years. So we're relieved for long term holders to see a bit of uplift. Of course the real question is whether the business can sustain a turnaround.

Check out our latest analysis for BrainChip Holdings

BrainChip Holdings recorded just US$509,623 in revenue over the last twelve months, which isn't really enough for us to consider it to have a proven product. 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). It seems likely some shareholders believe that BrainChip Holdings will significantly advance the business plan before too long.

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 almost always a chance they will need to raise more capital, and their progress - and share price - will dictate how dilutive that is to current holders. While some such companies do very well over the long term, others become hyped up by promoters before eventually falling back down to earth, and going bankrupt (or being recapitalized). Some BrainChip Holdings investors have already had a taste of the bitterness stocks like this can leave in the mouth.

When it reported in June 2019 BrainChip Holdings had minimal cash in excess of all liabilities consider its expenditure: just US$2.3m 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 39% per year, over 3 years . You can see in the image below, how BrainChip Holdings's cash levels have changed over time (click to see the values). You can click on the image below to see (in greater detail) how BrainChip Holdings's cash levels have changed over time.

ASX:BRN Historical Debt, September 29th 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? I'd like that just about as much as I like to drink milk and fruit juice mixed together. It costs nothing but a moment of your time to see if we are picking up on any insider selling.

A Different Perspective

Over the last year, BrainChip Holdings shareholders took a loss of 65%. In contrast the market gained about 12%. Of course the long term matters more than the short term, and even great stocks will sometimes have a poor year. The three-year loss of 39% per year isn't as bad as the last twelve months, suggesting that the company has not been able to convince the market it has solved its problems. 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.

If you would prefer to check out another company -- one with potentially superior financials -- then do not miss this free list of companies that have proven they can grow earnings.

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