Sovereign Cloud Holdings (ASX:SOV shareholders incur further losses as stock declines 14% this week, taking one-year losses to 30%

Investors can approximate the average market return by buying an index fund. When you buy individual stocks, you can make higher profits, but you also face the risk of under-performance. Investors in Sovereign Cloud Holdings Limited (ASX:SOV) have tasted that bitter downside in the last year, as the share price dropped 46%. That falls noticeably short of the market return of around 8.2%. Sovereign Cloud Holdings hasn't been listed for long, so although we're wary of recent listings that perform poorly, it may still prove itself with time. The falls have accelerated recently, with the share price down 41% in the last three months.

With the stock having lost 14% in the past week, it's worth taking a look at business performance and seeing if there's any red flags.

View our latest analysis for Sovereign Cloud Holdings

Because Sovereign Cloud Holdings made a loss in the last twelve months, we think the market is probably more focussed on revenue and revenue growth, at least for now. Shareholders of unprofitable companies usually expect strong revenue growth. That's because fast revenue growth can be easily extrapolated to forecast profits, often of considerable size.

In the last year Sovereign Cloud Holdings saw its revenue grow by 53%. That's well above most other pre-profit companies. Given the revenue growth, the share price drop of 46% seems quite harsh. Our sympathies to shareholders who are now underwater. Prima facie, revenue growth like that should be a good thing, so it's worth checking whether losses have stabilized.

The company's revenue and earnings (over time) are depicted in the image below (click to see the exact numbers).

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.

What About The Total Shareholder Return (TSR)?

We'd be remiss not to mention the difference between Sovereign Cloud Holdings' total shareholder return (TSR) and its share price return. Arguably the TSR is a more complete return calculation because it accounts for the value of dividends (as if they were reinvested), along with the hypothetical value of any discounted capital that have been offered to shareholders. We note that Sovereign Cloud Holdings' TSR, at -30% is higher than its share price return of -46%. When you consider it hasn't been paying a dividend, this data suggests shareholders have benefitted from a spin-off, or had the opportunity to acquire attractively priced shares in a discounted capital raising.

A Different Perspective

Given that the market gained 8.2% in the last year, Sovereign Cloud Holdings shareholders might be miffed that they lost 30%. While the aim is to do better than that, it's worth recalling that even great long-term investments sometimes underperform for a year or more. Notably, the loss over the last year isn't as bad as the 41% drop in the last three months. This probably signals that the business has recently disappointed shareholders - it will take time to win them back. 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. Case in point: We've spotted 6 warning signs for Sovereign Cloud Holdings you should be aware of, and 3 of them are significant.

Of course Sovereign Cloud Holdings 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 Australian exchanges.

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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.