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 Zai Lab Limited (NASDAQ:ZLAB) investors who have held the stock for three years as it declined a whopping 87%. That'd be enough to cause even the strongest minds some disquiet. The more recent news is of little comfort, with the share price down 49% in a year. The falls have accelerated recently, with the share price down 36% in the last three months. We note that the company has reported results fairly recently; and the market is hardly delighted. You can check out the latest numbers in our company report. While a drop like that is definitely a body blow, money isn't as important as health and happiness.
With the stock having lost 12% in the past week, it's worth taking a look at business performance and seeing if there's any red flags.
Because Zai Lab 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. When a company doesn't make profits, we'd generally expect to see good revenue growth. As you can imagine, fast revenue growth, when maintained, often leads to fast profit growth.
In the last three years, Zai Lab saw its revenue grow by 45% per year, compound. That's well above most other pre-profit companies. So on the face of it we're really surprised to see the share price down 23% a year in the same time period. The share price makes us wonder if there is an issue with profitability. Sometimes fast revenue growth doesn't lead to profits. If the company is low on cash, it may have to raise capital soon.
The company's revenue and earnings (over time) are depicted in the image below (click to see the exact numbers).
Zai Lab is a well known stock, with plenty of analyst coverage, suggesting some visibility into future growth. If you are thinking of buying or selling Zai Lab stock, you should check out this free report showing analyst consensus estimates for future profits.
A Different Perspective
Zai Lab shareholders are down 49% for the year, but the market itself is up 33%. 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 8% per year over five years. We realise that Baron Rothschild has said investors should "buy when there is blood on the streets", but we caution that investors should first be sure they are buying a high quality business. 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. Take risks, for example - Zai Lab has 2 warning signs we think you should be aware of.
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 American 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.