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Did Zai Lab's (NASDAQ:ZLAB) Share Price Deserve to Gain 38%?

Simply Wall St

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If you want to compound wealth in the stock market, you can do so by buying an index fund. But you can significantly boost your returns by picking above-average stocks. For example, the Zai Lab Limited (NASDAQ:ZLAB) share price is up 38% in the last year, clearly besting than the market return of around 5.9% (not including dividends). If it can keep that out-performance up over the long term, investors will do very well! We'll need to follow Zai Lab for a while to get a better sense of its share price trend, since it hasn't been listed for particularly long.

View our latest analysis for Zai Lab

We don't think Zai Lab's revenue of US$129,452 is enough to establish significant demand. So it seems that the investors more focused on would could be, than paying attention to the current revenues (or lack thereof). For example, they may be hoping that Zai Lab comes up with a great new treatment, before it runs out of money.

Companies that lack both meaningful revenue and profits are usually considered high risk. You should be aware that there is always a chance that this sort of company will need to issue more shares to raise money to continue pursuing its business plan. 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).

Zai Lab has plenty of cash in the bank, with net cash sitting at US$212m, when it last reported (December 2018). That allows management to focus on growing the business, and not worry too much about raising capital. And with the share price up 38% in the last year, the market is focussed on that blue sky potential. You can see in the image below, how Zai Lab's cash and debt levels have changed over time (click to see the values).

NasdaqGM:ZLAB Historical Debt, March 30th 2019

In reality it's hard to have much certainty when valuing a business that has neither revenue or profit. Given that situation, many of the best investors like to check if insiders have been buying shares. It's often positive if so, assuming the buying is sustained and meaningful. Luckily we are in a position to provide you with this free chart of insider buying (and selling).

A Different Perspective

Zai Lab shareholders should be happy with the total gain of 38% over the last twelve months. A substantial portion of that gain has come in the last three months, with the stock up 30% in that time. Demand for the stock from multiple parties is pushing the price higher; it could be that word is getting out about its virtues as a business. Shareholders might want to examine this detailed historical graph of past earnings, revenue and cash flow.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.