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Passive investing in an index fund is a good way to ensure your own returns roughly match the overall market. While individual stocks can be big winners, plenty more fail to generate satisfactory returns. Investors in Kingsoft Cloud Holdings Limited (NASDAQ:KC) have tasted that bitter downside in the last year, as the share price dropped 17%. That's disappointing when you consider the market returned 35%. Because Kingsoft Cloud Holdings hasn't been listed for many years, the market is still learning about how the business performs. On top of that, the share price is down 17% in the last week.
Given the past week has been tough on shareholders, let's investigate the fundamentals and see what we can learn.
Kingsoft Cloud Holdings isn't currently profitable, so most analysts would look to revenue growth to get an idea of how fast the underlying business is growing. Shareholders of unprofitable companies usually expect strong revenue growth. That's because fast revenue growth can be easily extrapolated to forecast profits, often of considerable size.
In the last year Kingsoft Cloud Holdings saw its revenue grow by 50%. That's a strong result which is better than most other loss making companies. Given the revenue growth, the share price drop of 17% seems quite harsh. Our sympathies to shareholders who are now underwater. Prima facie, revenue growth like that should be a good thing, so it's worth checking whether losses have stabilized. Our brains have evolved to think in linear fashion, so there's value in learning to recognize exponential growth. We are, in some ways, simply the wisest of the monkeys.
The image below shows how earnings and revenue have tracked over time (if you click on the image you can see greater detail).
Kingsoft Cloud Holdings is well known by investors, and plenty of clever analysts have tried to predict the future profit levels. So it makes a lot of sense to check out what analysts think Kingsoft Cloud Holdings will earn in the future (free analyst consensus estimates)
A Different Perspective
Given that the market gained 35% in the last year, Kingsoft Cloud Holdings shareholders might be miffed that they lost 17%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. With the stock down 8.6% over the last three months, the market doesn't seem to believe that the company has solved all its problems. Basically, most investors should be wary of buying into a poor-performing stock, unless the business itself has clearly improved. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Kingsoft Cloud Holdings , and understanding them should be part of your investment process.
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 US exchanges.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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