We Think Nektar Therapeutics (NASDAQ:NKTR) Needs To Drive Business Growth Carefully


We can readily understand why investors are attracted to unprofitable companies. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you’d have done very well indeed. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

Given this risk, we thought we’d take a look at whether Nektar Therapeutics (NASDAQ:NKTR) shareholders should be worried about its cash burn. For the purpose of this article, we’ll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). The first step is to compare its cash burn with its cash reserves, to give us its ‘cash runway’.

Check out our latest analysis for Nektar Therapeutics

Does Nektar Therapeutics Have A Long Cash Runway?

A company’s cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. When Nektar Therapeutics last reported its balance sheet in March 2022, it had zero debt and cash worth US$667m. Importantly, its cash burn was US$440m over the trailing twelve months. Therefore, from March 2022 it had roughly 18 months of cash runway. Notably, analysts forecast that Nektar Therapeutics will break even (at a free cash flow level) in about 4 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. The image below shows how its cash balance has been changing over the last few years.

debt-equity-history-analysis
NasdaqGS:NKTR Debt to Equity History May 11th 2022

How Well Is Nektar Therapeutics Growing?

Some investors might find it troubling that Nektar Therapeutics is actually increasing its cash burn, which is up 37% in the last year. Also concerning, operating revenue was actually down by 18% in that time. Taken together, we think these growth metrics are a little worrying. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

How Easily Can Nektar Therapeutics Raise Cash?

While Nektar Therapeutics seems to be in a fairly good position, it’s still worth considering how easily it could raise more cash, even just to fuel faster growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future growth. We can compare a company’s cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year’s operations.

Nektar Therapeutics’ cash burn of US$440m is about 61% of its US$721m market capitalisation. Given how large that cash burn is, relative to the market value of the entire company, we’d consider it to be a high risk stock, with the real possibility of extreme dilution.

So, Should We Worry About Nektar Therapeutics’ Cash Burn?

On this analysis of Nektar Therapeutics’ cash burn, we think its cash runway was reassuring, while its cash burn relative to its market cap has us a bit worried. One real positive is that analysts are forecasting that the company will reach breakeven. Considering all the measures mentioned in this report, we reckon that its cash burn is fairly risky, and if we held shares we’d be watching like a hawk for any deterioration. An in-depth examination of risks revealed 4 warning signs for Nektar Therapeutics that readers should think about before committing capital to this stock.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)

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.



Source link

Leave a Comment

Your email address will not be published.