Otonomy, Inc. (NASDAQ:OTIC) shareholders should be happy to see the share price up 18% in the last month. But that is meagre solace in the face of the shocking decline over three years. In that time the share price has melted like a snowball in the desert, down 84%. So it sure is nice to see a big of an improvement. Only time will tell if the company can sustain the turnaround.
We really hope anyone holding through that price crash has a diversified portfolio. Even when you lose money, you don’t have to lose the lesson.
We don’t think Otonomy’s revenue of US$745,000 is enough to establish significant demand. This state of affairs suggests that venture capitalists won’t provide funds on attractive terms. As a result, we think it’s unlikely shareholders are paying much attention to current revenue, but rather speculating on growth in the years to come. Investors will be hoping that Otonomy 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. 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). Some Otonomy investors have already had a taste of the bitterness stocks like this can leave in the mouth.
Otonomy had net cash of US$72m when it last reported (December 2018). While that’s nothing to panic about, there is some possibility the company will raise more capital, especially if profits are not imminent. With the share price down 46% per year, over 3 years, it seems likely that the need for cash is weighing on investors’ minds. You can see in the image below, how Otonomy’s cash and debt levels have changed over time (click to see the values).
It can be extremely risky to invest in a company that doesn’t even have revenue. There’s no way to know its value easily. Given that situation, would you be concerned if it turned out insiders were relentlessly selling stock? I would feel more nervous about the company if that were so. You can click here to see if there are insiders selling.
A Different Perspective
Otonomy shareholders are down 54% for the year, but the broader market is up 3.5%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Shareholders have lost 46% 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. Shareholders might want to examine this detailed historical graph of past 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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