Some stocks are best avoided. It hits us in the gut when we see fellow investors suffer a loss. For example, we sympathize with anyone who was caught holding iDreamSky Technology Holdings Limited (HKG:1119) during the five years that saw its share price drop a whopping 81%. And we doubt long term believers are the only worried holders, since the stock price has declined 58% over the last twelve months. Furthermore, it's down 63% in about a quarter. That's not much fun for holders. We really hope anyone holding through that price crash has a diversified portfolio. Even when you lose money, you don't have to lose the lesson.
Since iDreamSky Technology Holdings has shed HK$281m from its value in the past 7 days, let's see if the longer term decline has been driven by the business' economics.
Because iDreamSky Technology Holdings 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. Generally speaking, companies without profits are expected to grow revenue every year, and at a good clip. As you can imagine, fast revenue growth, when maintained, often leads to fast profit growth.
In the last five years iDreamSky Technology Holdings saw its revenue shrink by 8.4% per year. While far from catastrophic that is not good. If a business loses money, you want it to grow, so no surprises that the share price has dropped 13% each year in that time. We're generally averse to companies with declining revenues, but we're not alone in that. That is not really what the successful investors we know aim for.
The company's revenue and earnings (over time) are depicted in the image below (click to see the exact numbers).
We consider it positive that insiders have made significant purchases in the last year. Even so, future earnings will be far more important to whether current shareholders make money. Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here..
A Different Perspective
Investors in iDreamSky Technology Holdings had a tough year, with a total loss of 58%, against a market gain of about 34%. Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested. Unfortunately, last year's performance may indicate unresolved challenges, given that it was worse than the annualised loss of 13% over the last half decade. 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. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for iDreamSky Technology Holdings (of which 1 is potentially serious!) you should know about.
iDreamSky Technology Holdings is not the only stock that insiders are buying. For those who like to find lesser know companies this free list of growing companies with recent insider purchasing, could be just the ticket.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on Hong Kong 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.