Investing in stocks comes with the risk that the share price will fall. Unfortunately, shareholders of Unity Biotechnology, Inc. (NASDAQ:UBX) have suffered share price declines over the last year. To wit the share price is down 66% in that time. Because Unity Biotechnology hasn't been listed for many years, the market is still learning about how the business performs. Shareholders have had an even rougher run lately, with the share price down 29% in the last 90 days. This could be related to the recent financial results - you can catch up on the most recent data by reading our company report.
We don't think Unity Biotechnology's revenue of US$1,382,000 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? So it seems shareholders are too busy dreaming about the progress to come than dwelling on the current (lack of) revenue. For example, they may be hoping that Unity Biotechnology comes up with a great new product, before it runs out of money.
We think companies that have neither significant revenues nor profits are pretty 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 companies like this go on to deliver on their plan, making good money for shareholders, many end in painful losses and eventual de-listing. Unity Biotechnology has already given some investors a taste of the bitter losses that high risk investing can cause.
When it last reported its balance sheet in June 2019, Unity Biotechnology had cash in excess of all liabilities of US$101m. 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. With the share price down 66% in the last year, it seems likely that the need for cash is weighing on investors' minds. You can click on the image below to see (in greater detail) how Unity Biotechnology's cash levels have changed over time. The image below shows how Unity Biotechnology's balance sheet has changed over time; if you want to see the precise values, simply click on the image.
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? I would feel more nervous about the company if that were so. It only takes a moment for you to check whether we have identified any insider sales recently.
A Different Perspective
While Unity Biotechnology shareholders are down 66% for the year, the market itself is up 2.2%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. With the stock down 29% 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. Shareholders might want to examine this detailed historical graph of past earnings, revenue and cash flow.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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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