Owning shares of Organovo Holdings Inc (NASDAQ:ONVO) is nothing if not a roller-coaster ride. Back in August, I let investors know that I'd be buying shares of this 3-D bioprinting company for my real-life Roth IRA. Since then, the stock has had a few absolutely crazy swings—both up and down. But now, it sits 50% higher than when I originally bought in.
Could that mean it's time to sell this highflier?
Every year when the snow starts to melt and the sun sticks around a little longer, I review all of my stock holdings. Specifically, I look to see if anything I currently own still belongs in my family's stock portfolio.
I find that checking in once per year is enough to keep me "in the know" on our holdings, without being so frequent as to lose sight of the bigger picture. I heartily encourage you figure out a schedule that works for you to review your own stock holdings.
So today, I'm looking at the three best reasons for selling Organovo, and my take on them.
This is an unproven technology
Organovo's goal is to create human tissue that acts the same way in the lab as it does in the human body. The company sees this technology as being crucial to helping drug companies save billions in detecting toxicities that can't be discovered using traditional 2-D cells.
The problem -- from a bearish standpoint -- is that this is a brand-new, and unproven, technology. If Organovo's tissues -- especially its liver tissue for sale on the market by the end of this year -- fail to behave as native ones do, the company doesn't really have that much to offer.
I'm more than willing to accept this risk.
This year is going to be a big one for Organovo. At the start of 2014, management said it hoped to release its first product to the pharmaceutical market—liver tissues—by the end of December. But that timeline has already sped up.
At the end of January, Organovo announced its first delivery of liver tissues to a key opinion leader—a top research scientist. This was more than a month early, and I highly doubt this move would have been made if the liver tissues showed any signs of trouble during in-house functional validation testing.
The company has an awful income statement
There's no getting around this fact. Since Organovo was founded in 2007, it has only brought in a grand total of $3.3 million. That's ridiculously low, and almost all of that money came from collaborations with other companies and grants from public institutions. Since inception, Organovo has lost over $85 million, and has required continued rounds of financing or public offerings to stay afloat.
That's very normal for a start-up company like Organovo.
When you're developing a technological breakthrough like the 3-D printing of human tissues, you want to make sure you get the product right before going to market. That means spending gobs of money up front in the hopes of recouping those costs -- and more -- at a later date.
When I bought shares of Organovo, I was well aware of the fact that the company barely brought any money in. By this time next year, Organovo will have released its first product on the market, and for the first time as a company, will have a meaningful revenue stream via product offerings.
I believe that further development of other tissues -- like eye, skin, and even cancerous varieties -- could also provide more than enough revenue to offset past loss.
The valuation is ridiculous
As I said, Organovo has only brought in $3.3 million since it was founded seven years ago. No profit or positive free cash flow exists as of yet. And yet, Organovo is currently valued at over $650 million. It would be tough to find any other successful investment with such a sky-high valuation.
Fair enough, and here's how I'm protecting myself.
There are really two points to take into consideration before selling based on valuation. The first is the issue of an investment time horizon. If I was only looking to hold shares of Organovo for a few months, valuation would indeed be a good reason to sell.
But I'm looking to hold for years or -- if things go well -- decades. I see a company that has a number of different tissues in the pipeline, and could fundamentally shift how the drug industry conducts its research.
The second issue has to do with allocation. As of this writing, Organovo accounts for less than 1% of my family's overall holdings. I realize that this is a risky stock and that, should technology fail or competitors come out with an equal product, I'd lose most -- if not all -- of my money. That's why I have such a low allocation.
That being said, I think a starter position is a great way to follow such an interesting company, and I hope future successes will only encourage me to add more shares of Organovo as time goes on.