It is doubtless a positive to see that the Kala Pharmaceuticals, Inc. (NASDAQ:KALA) share price has gained some 42% in the last three months. But that's not enough to compensate for the decline over the last twelve months. Like a receding glacier in a warming world, the share price has melted 52% in that period. Some might say the recent bounce is to be expected after such a bad drop. Arguably, the fall was overdone.
Kala Pharmaceuticals hasn't yet reported any revenue yet, so it's as much a business idea as an actual business. We can't help wondering why it's publicly listed so early in its journey. Are venture capitalists not interested? So it seems that the investors more focused on would could be, than paying attention to the current revenues (or lack thereof). Investors will be hoping that Kala Pharmaceuticals can make progress and gain better traction for the business, before it runs low on cash.
We think companies that have neither significant revenues nor profits are pretty high risk. The is usually a significant chance that they will need more money for business development, putting them at the mercy of capital markets. So the share price itself impacts the value of the shares (as it determines the cost of capital). 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). It certainly is a dangerous place to invest, as Kala Pharmaceuticals investors might realise.
Kala Pharmaceuticals had net cash of just US$55m when it last reported (December 2018). So if it has not already moved to replenish reserves, we think the near-term chances of a capital raising event are pretty high. With that in mind, you can understand why the share price dropped 52% in the last year. You can click on the image below to see (in greater detail) how Kala Pharmaceuticals's cash and debt levels have changed over time.
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
While Kala Pharmaceuticals shareholders are down 52% for the year, the market itself is up 12%. While the aim is to do better than that, it's worth recalling that even great long-term investments sometimes underperform for a year or more. It's great to see a nice little 42% rebound in the last three months. This could just be a bounce because the selling was too aggressive, but fingers crossed it's the start of a new trend. You could get a better understanding of Kala Pharmaceuticals's growth by checking out this more detailed historical graph of 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.
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