Stock Analysis

Is Energous (NASDAQ:WATT) In A Good Position To Invest In Growth?

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NasdaqCM:WATT
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We can readily understand why investors are attracted to unprofitable companies. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So should Energous (NASDAQ:WATT) shareholders be worried about its cash burn? For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

See our latest analysis for Energous

How Long Is Energous' Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. In June 2021, Energous had US$38m in cash, and was debt-free. Looking at the last year, the company burnt through US$24m. That means it had a cash runway of around 19 months as of June 2021. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. The image below shows how its cash balance has been changing over the last few years.

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NasdaqCM:WATT Debt to Equity History October 27th 2021

How Is Energous' Cash Burn Changing Over Time?

Whilst it's great to see that Energous has already begun generating revenue from operations, last year it only produced US$482k, so we don't think it is generating significant revenue, at this point. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. As it happens, the company's cash burn reduced by 3.9% over the last year, which suggests that management are maintaining a fairly steady rate of business development, albeit with a slight decrease in spending. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.

Can Energous Raise More Cash Easily?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Energous to raise more cash in the future. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

Since it has a market capitalisation of US$119m, Energous' US$24m in cash burn equates to about 20% of its market value. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.

Is Energous' Cash Burn A Worry?

Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought Energous' cash runway was relatively promising. We don't think its cash burn is particularly problematic, but after considering the range of factors in this article, we do think shareholders should be monitoring how it changes over time. On another note, we conducted an in-depth investigation of the company, and identified 4 warning signs for Energous (2 are a bit unpleasant!) that you should be aware of before investing here.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)

What are the risks and opportunities for Energous?

Energous Corporation develops wireless charging solutions.

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Rewards

  • Revenue is forecast to grow 125.41% per year

  • Earnings have grown 9.6% per year over the past 5 years

Risks

  • Makes less than USD$1m in revenue ($898K)

  • Does not have a meaningful market cap ($65M)

  • Shareholders have been diluted in the past year

  • Currently unprofitable and not forecast to become profitable over the next 3 years

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