PhaseBio Pharmaceuticals, Inc. (NASDAQ:PHAS) shareholders should be happy to see the share price up 21% in the last week. But that isn't much consolation for the painful drop we've seen in the last year. Specifically, the stock price nose-dived 74% in that time. It's not uncommon to see a bounce after a drop like that. The real question is whether the company can turn around its fortunes.
With just US$2,361,000 worth of revenue in twelve months, we don't think the market considers PhaseBio Pharmaceuticals to have proven its business plan. You have to wonder why venture capitalists aren't funding it. 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 PhaseBio Pharmaceuticals 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 to raise equity. 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. PhaseBio Pharmaceuticals has already given some investors a taste of the bitter losses that high risk investing can cause.
When it last reported its balance sheet in December 2019, PhaseBio Pharmaceuticals had cash in excess of all liabilities of US$52m. While that's nothing to panic about, there is some possibility the company will raise more capital, especially if profits are not imminent. We'd venture that shareholders are concerned about the need for more capital, because the share price has dropped 74% in the last year. The image below shows how PhaseBio Pharmaceuticals's balance sheet has changed over time; if you want to see the precise values, simply click on the image.
In reality it's hard to have much certainty when valuing a business that has neither revenue or profit. What if insiders are ditching the stock hand over fist? I would feel more nervous about the company if that were so. It costs nothing but a moment of your time to see if we are picking up on any insider selling.
A Different Perspective
PhaseBio Pharmaceuticals shareholders are down 74% for the year, even worse than the market loss of 4.0%. That's disappointing, but it's worth keeping in mind that the market-wide selling wouldn't have helped. With the stock down 30% over the last three months, the market doesn't seem to believe that the company has solved all its problems. Given the relatively short history of this stock, we'd remain pretty wary until we see some strong business performance. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. Consider for instance, the ever-present spectre of investment risk. We've identified 6 warning signs with PhaseBio Pharmaceuticals (at least 2 which are potentially serious) , and understanding them should be part of your investment process.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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