The art and science of stock market investing requires a tolerance for losing money on some of the shares you buy. But serious investors should think long and hard about avoiding extreme losses. We wouldn't blame Synlogic, Inc. (NASDAQ:SYBX) shareholders if they were still in shock after the stock dropped like a lead balloon, down 78% in just one year. While some investors are willing to stomach this sort of loss, they are usually professionals who spread their bets thinly. Because Synlogic hasn't been listed for many years, the market is still learning about how the business performs. Furthermore, it's down 66% in about a quarter. That's not much fun for holders.
We don't think Synlogic's revenue of US$2,600,000 is enough to establish significant demand. We can't help wondering why it's publicly listed so early in its journey. Are venture capitalists not interested? 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. For example, they may be hoping that Synlogic comes up with a great new product, before it runs out of money.
Companies that lack both meaningful revenue and profits are usually considered high risk. There 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 go on to make revenue, profits, and generate value, others get hyped up by hopeful naifs before eventually going bankrupt. Some Synlogic investors have already had a taste of the bitterness stocks like this can leave in the mouth.
Synlogic had cash in excess of all liabilities of US$95m when it last reported (June 2019). That's not too bad but management may have to think about raising capital or taking on debt, unless the company is close to breaking even. We'd venture that shareholders are concerned about the need for more capital, because the share price has dropped 78% in the last year. You can click on the image below to see (in greater detail) how Synlogic's cash levels have changed over time. You can click on the image below to see (in greater detail) how Synlogic's cash levels have changed over time.
Of course, the truth is that it is hard to value companies without much revenue or profit. What if insiders are ditching the stock hand over fist? I'd like that just about as much as I like to drink milk and fruit juice mixed together. It only takes a moment for you to check whether we have identified any insider sales recently.
A Different Perspective
While Synlogic shareholders are down 78% for the year, the market itself is up 4.2%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. With the stock down 66% over the last three months, the market doesn't seem to believe that the company has solved all its problems. Given the relatively short history of this stock, we'd remain pretty wary until we see some strong business performance. You could get a better understanding of Synlogic's growth by checking out this more detailed historical graph of earnings, revenue and cash flow.
Of course Synlogic may not be the best stock to buy. So you may wish to see this free collection of growth stocks.
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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