These days it’s easy to simply buy an index fund, and your returns should (roughly) match the market. But one can do better than that by picking better than average stocks (as part of a diversified portfolio). For example, the Zai Lab Limited (NASDAQ:ZLAB) share price is up 36% in the last year, clearly besting than the market return of around 0.6% (not including dividends). If it can keep that out-performance up over the long term, investors will do very well! Zai Lab hasn’t been listed for long, so it’s still not clear if it is a long term winner.
With just US$129,452 worth of revenue in twelve months, we don’t think the market considers Zai Lab to have proven its business plan. 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 Zai Lab comes up with a great new treatment, before it runs out of money.
Companies that lack both meaningful revenue and profits are usually considered high risk. The 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.
Zai Lab has plenty of cash in the bank, with net cash sitting at US$212m, when it last reported (December 2018). That allows management to focus on growing the business, and not worry too much about raising capital. And given that the share price has shot up 36% in the last year, its fair to say investors are liking management’s vision for the future. You can click on the image below to see (in greater detail) how Zai Lab’s cash and debt levels have changed over time.
It can be extremely risky to invest in a company that doesn’t even have revenue. There’s no way to know its value easily. One thing you can do is check if company insiders are buying shares. It’s usually a positive if they have, as it may indicate they see value in the stock. Luckily we are in a position to provide you with this free chart of insider buying (and selling).
A Different Perspective
Zai Lab boasts a total shareholder return of 36% for the last year. And the share price momentum remains respectable, with a gain of 14% in the last three months. Demand for the stock from multiple parties is pushing the price higher; it could be that word is getting out about its virtues as a business. You might want to assess this data-rich visualization of its earnings, revenue and cash flow.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US exchanges.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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. Thank you for reading.