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It's not a secret that every investor will make bad investments, from time to time. But it should be a priority to avoid stomach churning catastrophes, wherever possible. We wouldn't blame Flamingo AI Limited (ASX:FGO) shareholders if they were still in shock after the stock dropped like a lead balloon, down 86% in just one year. A loss like this is a stark reminder that portfolio diversification is important. Flamingo AI may have better days ahead, of course; we've only looked at a one year period. Furthermore, it's down 45% in about a quarter. That's not much fun for holders.
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.
See our latest analysis for Flamingo AI
Flamingo AI recorded just AU$635,692 in revenue over the last twelve months, which isn't really enough for us to consider it to have a proven product. You have to wonder why venture capitalists aren't funding it. As a result, we think it's unlikely shareholders are paying much attention to current revenue, but rather speculating on growth in the years to come. It seems likely some shareholders believe that Flamingo AI will significantly advance the business plan before too long.
As a general rule, if a company doesn't have much revenue, and it loses money, then it is a high risk investment. There 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 such companies go on to make revenue, profits, and generate value, others get hyped up by hopeful naifs before eventually going bankrupt. Some Flamingo AI investors have already had a taste of the bitterness stocks like this can leave in the mouth.
When it reported in December 2018 Flamingo AI had minimal net cash consider its expenditure: just AU$5.8m 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 86% in the last year. The image below shows how Flamingo AI'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. What if insiders are ditching the stock hand over fist? It would bother me, that's for sure. It costs nothing but a moment of your time to see if we are picking up on any insider selling.