It is a pleasure to report that the Urban Tea, Inc. (NASDAQ:MYT) is up 103% in the last quarter. But that doesn’t change the fact that the returns over the last year have been less than pleasing. In fact the stock is down 30% in the last year, well below the market return.
With just US$401,814 worth of revenue in twelve months, we don’t think the market considers Urban Tea to have proven its business plan. We can’t help wondering why it’s publicly listed so early in its journey. Are venture capitalists not interested? So it seems that the investors focused more on what could be, than paying attention to the current revenues (or lack thereof). Investors will be hoping that Urban Tea 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. 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.
Urban Tea had cash in excess of all liabilities of US$7.1m 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. With the share price down 30% in the last year , it seems likely that the need for cash is weighing on investors’ minds. You can see in the image below, how Urban Tea’s cash levels have changed over time (click to see the values). You can click on the image below to see (in greater detail) how Urban Tea’s cash levels have changed over time.
In reality it’s hard to have much certainty when valuing a business that has neither 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. It only takes a moment for you to check whether we have identified any insider sales recently.
A Different Perspective
Over the last year, Urban Tea shareholders took a loss of 30%. In contrast the market gained about 30%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. The three-year loss of 7.8% per year isn’t as bad as the last twelve months, suggesting that the company has not been able to convince the market it has solved its problems. We would be wary of buying into a company with unsolved problems, although some investors will buy into struggling stocks if they believe the price is sufficiently attractive. You might want to assess this data-rich visualization of its 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.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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