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It might seem bad, but the worst that can happen when you buy a stock (without leverage) is that its share price goes to zero. But in contrast you can make much more than 100% if the company does well. For example, the Denali Therapeutics Inc. (NASDAQ:DNLI) share price has soared 206% in the last three years. How nice for those who held the stock! It's even up 13% in the last week.
Since the stock has added US$765m to its market cap in the past week alone, let's see if underlying performance has been driving long-term returns.
While Denali Therapeutics made a small profit, in the last year, we think that the market is probably more focussed on the top line growth at the moment. As a general rule, we think this kind of company is more comparable to loss-making stocks, since the actual profit is so low. It would be hard to believe in a more profitable future without growing revenues.
Over the last three years Denali Therapeutics has grown its revenue at 67% annually. That's well above most pre-profit companies. Along the way, the share price gained 45% per year, a solid pop by our standards. But it does seem like the market is paying attention to strong revenue growth. Nonetheless, we'd say Denali Therapeutics is still worth investigating - successful businesses can often keep growing for long periods.
The image below shows how earnings and revenue have tracked over time (if you click on the image you can see greater detail).
Denali Therapeutics is well known by investors, and plenty of clever analysts have tried to predict the future profit levels. So we recommend checking out this free report showing consensus forecasts
A Different Perspective
Denali Therapeutics shareholders are up 3.1% for the year. While you don't go broke making a profit, this return was actually lower than the average market return of about 36%. But the (superior) three-year TSR of 45% per year is some consolation. Even the best companies don't see strong share price performance every year. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. Take risks, for example - Denali Therapeutics has 1 warning sign we think you should be aware of.
But note: Denali Therapeutics may not be the best stock to buy. So take a peek at this free list of interesting companies with past earnings growth (and further growth forecast).
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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