It's not possible to invest over long periods without making some bad investments. But you have a problem if you face massive losses more than once in a while. So consider, for a moment, the misfortune of 5th Planet Games A/S ( OB:FIVEPG ) investors who have held the stock for three years as it declined a whopping 91%. That would be a disturbing experience. And over the last year the share price fell 65%, so we doubt many shareholders are delighted. The falls have accelerated recently, with the share price down 33% in the last three months.
We really feel for shareholders in this scenario. It's a good reminder of the importance of diversification, and it's worth keeping in mind there's more to life than money, anyway.
With just ø5,964,000 worth of revenue in twelve months, we don't think the market considers 5th Planet Games to have proven its business plan. You have to wonder why venture capitalists aren't funding it. So it seems shareholders are too busy dreaming about the progress to come than dwelling on the current (lack of) revenue. Investors will be hoping that 5th Planet Games 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. You should be aware that there is always a chance that this sort of company will need to issue more shares to raise money to continue pursuing its business plan. While some such companies do very well over the long term, others become hyped up by promoters before eventually falling back down to earth, and going bankrupt (or being recapitalized). It certainly is a dangerous place to invest, as 5th Planet Games investors might realise.
When it reported in December 2018 5th Planet Games had minimal cash in excess of all liabilities consider its expenditure: just ø8.2m to be specific. So if it has not already moved to replenish reserves, we think the near-term chances of a capital raising event are pretty high. That probably explains why the share price is down 55% per year, over 3 years. You can see in the image below, how 5th Planet Games's cash levels have changed over time (click to see the values). The image below shows how 5th Planet Games's balance sheet has changed over time; if you want to see the precise values, simply click on the image.
In reality it's hard to have much certainty when valuing a business that has neither revenue or profit. Would it bother you if insiders were selling the stock? I'd like that just about as much as I like to drink milk and fruit juice mixed together. You can click here to see if there are insiders selling.
A Different Perspective
The last twelve months weren't great for 5th Planet Games shares, which performed worse than the market, costing holders 65%. Meanwhile, the broader market slid about 9.9%, likely weighing on the stock. Shareholders have lost 54% per year over the last three years, so the share price drop has become steeper, over the last year; a potential symptom of as yet unsolved challenges. Although Warren Buffett famously said he likes to 'buy when there is blood on the streets', he also focusses on high quality stocks with solid prospects. You could get a better understanding of 5th Planet Games's growth by checking out this more detailed historical graph of earnings, revenue and cash flow.
If you would prefer to check out another company -- one with potentially superior financials -- then do not miss this free list of companies that have proven they can grow earnings.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on NO exchanges.
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