DryShips (DRYS), FireEye (MNDT), and Anavex Life Sciences (AVXL -7.34%) are very different companies, but they do share one thing in common: financial headwinds. It's anyone's guess if these three stocks will go up or down over the next few years, but given that each must overcome substantial challenges that could derail them, they're probably too risky for most investors.
Let's see what some of our Foolish writers have to say about each business.
2020 could be optimistic
Rich Smith (DryShips): A company that might not live to see 2020? How about a company that might not live to see next week?
IMAGE SOURCE: GETTY IMAGES.
Seriously, folks: Owning shares of dry bulk shipper DryShips these days feels like taking your life in your hands. Hardly a day goes by when DryShips stock doesn't either rise or fall more than 10%. Although the company boasted a market cap of roughly $200 million earlier this year, the market now values the company at a mere $50 million or so. With a tiny share price and an even tinier float, DryShips stock can be tossed around by the gentlest waves of investor sentiment.
Management isn't making things any easier for investors, either, floating a plan last month that seems tailor-made to massively dilute outside investors and transfer control of the company to an unknown party (who may or may not be its chairman, George Economou). Profitless and burning cash, in mid-February, DryShips finalized an agreement to sell "up to $200 million of DryShips stock" to Kalani Investment Limited, a company whose ownership is a complete mystery.
Did I mention that all of DryShips is currently valued at far less than $200 million? I did? OK, so then you see why I'm concerned. When making a list of companies that might not live to see 2020, DryShips should be at the very top.
Right place, right time, but not enough
Tim Brugger (FireEye): With the shift to the cloud, Internet of Things, and mobile devices, securing the unprecedented reams of data amassed in our digitized world has been a boon for most security solutions providers.
FireEye, however, has not been one of them: Its stock is down 7% year-to-date, and if not for a bullish run last month driven by potential buyout rumors, it could be in even worse shape.
Like its peers, FireEye is transitioning to a focus on generating recurring revenue via its subscription services, and it’s working -- to an extent. Subscription revenue climbed 28% to $151.1 million last quarter.
However, FireEye ended 2016 with $184.7 million in fourth quarter revenue, essentially flat year over year. And subscription revenue already accounts for 82% of sales, so how much more upside is there? Cutting 38% of sales overhead, likely part of last year’s workforce reductions, could make it even tougher for the company to head off intense competition in the industry going forward.
And FireEye’s sales growth is expected to stall further. Partly due to “product and management transitions", revenue guidance for this quarter is just $160 million to $166 million, down from last year’s $168 million. A higher percentage of revenue may be subscription-based, but declines in billings and ongoing cost-cutting initiatives mean investors will have to show a great deal of patience before the company's prospects brighten.
FireEye is in the right market, at the right time, and it still can’t deliver, nor does it expect to anytime soon. By 2020, don’t be surprised to see FireEye’s products and services with another data security provider’s label on them.
A shot in the dark -- and a long one, at that
Todd Campbell (Anavex Life Sciences): For patients' sake, I hope I'm wrong. But with only $21 million in cash on the books and a costly, high-risk Alzheimer's disease drug as its most advanced product candidate, there's plenty of reason to wonder about Anavex Life Sciences' long-term survival.
Laboratory dustbins are packed with Alzheimer's disease drugs that have failed in late-stage clinical trials after showing promise in mid-stage clinical trials, and as a result, investors should approach last year's news regarding Anavex Life Sciences' 2-73 Alzheimer's disease drug with a healthy dose of skepticism. The relevant trial included only 32 patients, wasn't designed to prove efficacy, and didn't include a placebo control group.
It will take a much larger and costlier trial to truly determine 2-73's efficacy and safety, and, frankly, the mountain to success may be too steep for this company to climb, particularly given its limited cash position. Anavex Life Sciences' $21 million simply isn't enough to conduct the studies necessary, and that means it's going to have to issue more shares, incur debt, or find a deep-pocketed partner to help it develop 2-73. For perspective, Axovant Sciences is conducting a 1,150-person phase 3 study of its Alzheimer's disease drug, and it's spending over $30 million on R&D per quarter.
Anavex disclosed in its latest quarterly 10-Q report that it's exploring partnership opportunities for 2-73, and that a phase 2/3 study is being planned, so investors will want to keep an eye out for updates. Absent progress, it's likely the company will raise cash by issuing more shares to Lincoln Park Capital. Lincoln Park is obligated to buy up $50 million in Anavex Life Sciences shares under a 2015 deal, and as of December, $33,513,928 remained available under the agreement.
Overall, while this funding source offers some financial wiggle room in the short term, I still have big questions regarding long-term financing of its 2-73 research program. For that reason, I'm content to root for their success from the sidelines.
