Stock Analysis

Investors in Mesoblast (ASX:MSB) from three years ago are still down 40%, even after 16% gain this past week

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ASX:MSB
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It is doubtless a positive to see that the Mesoblast Limited (ASX:MSB) share price has gained some 40% in the last three months. But that cannot eclipse the less-than-impressive returns over the last three years. Truth be told the share price declined 40% in three years and that return, Dear Reader, falls short of what you could have got from passive investing with an index fund.

Although the past week has been more reassuring for shareholders, they're still in the red over the last three years, so let's see if the underlying business has been responsible for the decline.

Our analysis indicates that MSB is potentially undervalued!

Mesoblast isn't currently profitable, so most analysts would look to revenue growth to get an idea of how fast the underlying business is growing. When a company doesn't make profits, we'd generally expect to see good revenue growth. That's because fast revenue growth can be easily extrapolated to forecast profits, often of considerable size.

Over the last three years, Mesoblast's revenue dropped 46% per year. That's definitely a weaker result than most pre-profit companies report. With revenue in decline, the share price decline of 12% per year is hardly undeserved. The key question now is whether the company has the capacity to fund itself to profitability, without more cash. Of course, it is possible for businesses to bounce back from a revenue drop - but we'd want to see that before getting interested.

You can see how earnings and revenue have changed over time in the image below (click on the chart to see the exact values).

earnings-and-revenue-growth
ASX:MSB Earnings and Revenue Growth December 6th 2022

Balance sheet strength is crucial. It might be well worthwhile taking a look at our free report on how its financial position has changed over time.

A Different Perspective

While the broader market gained around 3.4% in the last year, Mesoblast shareholders lost 28%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Regrettably, last year's performance caps off a bad run, with the shareholders facing a total loss of 3% per year over five years. Generally speaking long term share price weakness can be a bad sign, though contrarian investors might want to research the stock in hope of a turnaround. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for Mesoblast you should know about.

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 AU exchanges.

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Find out whether Mesoblast is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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