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It is a pleasure to report that the Prothena Corporation plc (NASDAQ:PRTA) is up 55% in the last quarter. But only the myopic could ignore the astounding decline over three years. In that time the share price has melted like a snowball in the desert, down 71%. So we're relieved for long term holders to see a bit of uplift. But the more important question is whether the underlying business can justify a higher price still.
We don't think Prothena's revenue of US$752,000 is enough to establish significant demand. 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). It seems likely some shareholders believe that Prothena has the funding to invent a new product 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. 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). Prothena 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 September 2019, Prothena could boast a strong position, with cash in excess of all liabilities of US$229m. That allows management to focus on growing the business, and not worry too much about raising capital. But since the share price has dropped 34% per year, over 3 years , it seems like the market might have been over-excited previously. You can see in the image below, how Prothena's cash levels have changed over time (click to see the values). You can see in the image below, how Prothena's cash levels have changed over time (click to see the values).
In reality it's hard to have much certainty when valuing a business that has neither revenue or profit. Would it bother you if insiders were selling the stock? 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
Prothena shareholders gained a total return of 19% during the year. But that was short of the market average. On the bright side, that's still a gain, and it is certainly better than the yearly loss of about 9.1% endured over half a decade. It could well be that the business is stabilizing. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. For example, we've discovered 3 warning signs for Prothena (1 doesn't sit too well with us!) that you should be aware of before investing here.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies we expect will grow earnings.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US exchanges.
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.
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