Company revenue increased however stock price did not

Question

Recently I have been looking into putting money into some stocks.

I am really trying to learn about where and how to put my money in as I do not have a lot to start and was looking at some penny stocks.

I have been doing a lot of research looking over the charts and tables from TD Ameritrade I think I have found some 'ok' ones.

A friend of mine told me about this 1 particular stock that is going to make some good money 'eventually'.

Doing some really heavy research into this stock has made me question the whole penny stock market.

This is probably going to be a 3 part question. The stock in question is (MSPC)

1. Looking over some historical data I cannot really a find a case where a stock went from $0.0005 to $1 it almost seem that once a stock crosses a minimum threshold the stock never goes back up. Is there any truth to that?

2. The company released its 2nd Quarter Revenue of $1,957,921 a couple days ago however the stock did not move up in any way. Why? If the company is making money shouldn't the stock go up. There has been very heavy volume for the past 6 months but yet the prices seems to never hit over .0005.

   http://www.nasdaq.com/press-release/metrospaces-announces-2nd-quarter-revenue-of-1957921-for-2017-20170711-00594

3. Looking at it long term would it hurt me in anyway to buy ~100,000 shares which right now would run be about $24 (including to fee) and sit on it?

Answer 1

It's great that you have gotten the itch to learn about the stock market. There are a couple of fundamentals to understand first though.

1. The number of shares you own is meaningless.

Company A has strong, growing, net earnings and minimal debt, it's trading for $100 per share. Company B has good revenue but high costs of goods and total liabilities well in excess of total assets, it's trading for $0.10 per share. There is no benefit to getting 10,000 shares or 10 shares for your $1,000. Your goal is to invest in companies that have valuable products and services run by competent management teams. Sure, the number of shares you own will dictate what percentage of the company you own, and in a number of cases, your voting power. But even a penny stock will have a market capitalization of several million dollars so voting power isn't really a concern for your $1,000 investment.

2. Enterprise valuation is an extremely complex art

There is a lot more in the three basic financial statements (Income Statement, Balance Sheet, Statement of Cash Flows) than revenue. Seasoned accountants can have a hard time parsing out where money is coming from and where it's going. In general there are obvious red flags, like a fast declining cash balance against a fast growing liabilities balance or expenses exceeding revenue. While some of these things are common among new and high growth companies, it's not the place for a new investor with a small bankroll.

3. Financing rounds are complex

A micro-cap company (penny stocks are in this group) will receive rounds of financing via issuing preferred convertible shares which may include options on more shares. For a company worth $20mm a $5mm financing round can materially change the finances of a company, and will likely dilute your holdings in common stock. Small growth companies need new financing frequently to fund their growth strategies.

4. Pretty much everything in valuation is relative

Revenue went up, great... why? Did you open another store? Did you open another sales office? Did the revenue increase this quarter based on substantially the same operation that existed last quarter or have you increased the capacity of your operation? If you increased the capacity of your operation what was the cost of the increase and did revenue increase as expected? Can you expect revenue to continue to grow at this rate or was it a one time windfall from an unusual order?

5. The first goal of investing is "Don't lose money"

Sure, there are spectacular gains to be had in penny stocks. XYZ Pharma Research (or whatever) goes from $0.05 to $0.60 and you've turned your $1,000 in to $12,000. This is a really unlikely event... Buying penny stocks is akin to buying lottery tickets. Unless you are a high ranking employee at the company capable of making decisions, or one of the investors buying the preferred shares mentioned in point 3, or are one of the insiders of a pump and dump scam on the stock, penny common stocks are not a place to invest. One could argue that even a company insider should probably avoid buying common stock.

Just to illustrate the points above, you mention:

Doing some really heavy research into this stock has made me question the whole penny stock market.

Based on your research what is the enterprise value of the company? What were the gross proceeds of the last financing round, how many shares were issued and were there any warrants attached?

What do you perceive to be heavy research? What background do you have in finance/accounting to give weight to your ability to perform such research?

Crawl. Walk. Then run. Don't kid yourself in to thinking that since you have some level of education you understand the contracts involved in enterprise finance.

Answer 2

looking over some historical data I cannot really a find a case where a stock went from $0.0005 to $1 it almost seem that once a stock crosses a minimum threshold the stock never goes back up. Is there any truth to that?

That would be a 2000X (200,000%) increase in the per-share value which would be extraordinary. When looking at stock returns you have to look at percentage returns, not dollar returns. A gain of $1 would be minuscule for Berkshire-Hathaway stock but would be astronomical for this stock,.

If the company is making money shouldn't the stock go up?

Not necessarily. The price of a stock is a measure of expected future performance, not necessarily past performance. If the earnings had been more that the market expected, then the price might go up, but if the market sees it as an anomaly that won't continue then there may not be enough buyers to move the stock up.

looking at it long term would it hurt me in anyway to buy ~100,000 shares which right now would run be about $24 (including to fee) and sit on it?

If you can afford to lose all $24 then no, it won't hurt. But I wouldn't expect that $24 to turn into anything higher than about $100. At best it might be an interesting learning experience.

Answer 3

The company released its 2nd Quarter Revenue of $1,957,921 a couple days ago however the stock did not move up in any way. Why? If the company is making money shouldn't the stock go up.

But that result doesn't indicate that the company is making money. The word for making money is profit, not revenue. Profit equals revenue minus costs. An increasing revenue could mean decreasing profits. For example, marketing expenses could eat up the entirety of the new revenue.

This is one of the most basic aspects of researching stocks. If you are having trouble with this, you might find yourself better suited to invest in mutual funds, where they do this research for you. In particular, the safest kind of mutual funds for an inexperienced investor are index funds that track a major index, like the S&P 500.

Another issue is that stock prices aren't based on historical results but on expected future results. Many a company has reported smaller than expected profits and had their price fall even though profits increased from previous results.

Looking at it long term would it hurt me in anyway to buy ~100,000 shares which right now would run be about $24 (including to fee) and sit on it?

It would cost you $24. You might get a return some day. Or you might waste your money. Given the comparatively large upside, the consensus seems to be that you will probably waste your money. That said, it's not a lot of money to waste. So it won't hurt you that much. The most likely result remains that the company will go bankrupt, leaving your stock worthless.

Answer 4

Note that we do not comment on specific stocks here, and have no place doing so. If your question is only about that specific stock then it is off topic. I have not tried to answer that part below.

The key to valuation is predicting the net present value of all of a company's cash flows; i.e. of their future profits and losses. Through a number of methods to long to explain here investment banks and hedge funds work out what they expect the company's cash flows to be and trade so that these future profits, losses etc. are priced into the stock price. Since future cash flows, profits or whatever you want to call them are priced in, the price of a stock shouldn't move at all on an earnings statement.

This begs the question "why do some stock prices move violently when they announce earnings?"

The models that the institutional investors use are not perfect and cannot take into account everything. An unexpected craze for a product or a supply chain agreement breaking down on not being as good as it seems will not be factored into this pricing and so the price will move based on the degree to which expectation is missed or exceeded.

Since penny socks are speculative their value is based far more on the long term expected cash flows and less on the short run cash flows. This goes a long way to explaining why some of the highest market capitalisation penny stocks are those making consistent losses. This means that they can be far less susceptible to price movements after an earnings announcement even if it is well out of the consensus range. Higher (potential) future value comes with the higher risks of penny stocks which discounts current value.

In the end if people's expectation of the company's performance reflects reality then the profitability is priced in and there will be no price movement. If the actuality is outside of the expected range then there will be a price movement.

Answer 5

If you believe in the efficient market hypothesis then the stock price reflects the information known to market participants. Consequently, if the 'market' expected earnings to rise, and they did, then the price won't change.

Clearly there are circumstances, especially in the short term and for illiquid stocks, where this isn't true, but a lot of work points to this being the case on average.

Answer 6

The company released its 2nd Quarter Revenue of $1,957,921 a couple days ago however the stock did not move up in any way. Why? If the company is making money shouldn't the stock go up.

During the time between earnings announcements, analysts occasionally publish their assessment of a company, including their estimate of the company's value and future earnings. And as part of an earnings report, companies often include "guidance": their prediction for the upcoming quarter (this will frequently be a conservative estimate, so they're more likely to achieve it). Investors make their purchase and sale decisions based on this information.

When the earnings report comes out, investors compare these actual returns to analysts' predictions and the company's guidance. If their results are in line with these predictions, the stock price is unlikely to move much, as those results are already incorporated into the stock price. If the company is doing better than predicted, it's usually a good sign, and the price often rises; conversely, if it's doing worse, the price will likely fall.

But it's not as simple as this. As others have explained, for long-term investors, stock prices are based on expectations of future activity. If the results of that quarter include some one-time actions that are unlikely to repeat, investors will often discount that portion.