BrainChip Holdings Limited (ASX:BRN) shareholders should be happy to see the share price up 14% in the last week. But that is meagre solace in the face of the shocking decline over three years. The share price has sunk like a leaky ship, down 72% in that time. So it’s about time shareholders saw some gains. But the more important question is whether the underlying business can justify a higher price still.
BrainChip Holdings recorded just US$947,989 in revenue over the last twelve months, which isn’t really enough for us to consider it to have a proven product. This state of affairs suggests that venture capitalists won’t provide funds on attractive terms. So it seems shareholders are too busy dreaming about the progress to come than dwelling on the current (lack of) revenue. It seems likely some shareholders believe that BrainChip Holdings will significantly advance the business plan before too long.
Companies that lack both meaningful revenue and profits are usually considered high risk. There is almost always a chance they will need to raise more capital, and their progress – and share price – will dictate how dilutive that is to current holders. 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). Some BrainChip Holdings investors have already had a taste of the bitterness stocks like this can leave in the mouth.
BrainChip Holdings had net cash of just US$6.3m 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. That probably explains why the share price is down 35% per year, over 3 years. You can click on the image below to see (in greater detail) how BrainChip Holdings’s cash and debt levels have changed over time.
Of course, the truth is that it is hard to value companies without much revenue or profit. Given that situation, would you be concerned if it turned out insiders were relentlessly selling stock? It would bother me, that’s for sure. You can click here to see if there are insiders selling.
A Different Perspective
Over the last year, BrainChip Holdings shareholders took a loss of 60%. In contrast the market gained about 11%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Shareholders have lost 35% per year over the last three years, so the share price drop has become steeper, over the last year; a potential symptom of as yet unsolved challenges. Although Warren Buffett famously said he likes to ‘buy when there is blood on the streets’, he also focusses on high quality stocks with solid prospects. You might want to assess this data-rich visualization of its earnings, revenue and cash flow.
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 AU exchanges.
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