The risks of investing in unprofitable tech stocks with elevated valuations were underlined today when Reffind Ltd (ASX: RFN) released its quarterly report to the market, causing shares to drop as much as 20%.
Here's what you need to know:
- Revenue rose 25% to $142,000
- End user numbers grew 72%
- Signed new organisations including Nestle, Adobe, Charter Hall, Konekt, and Super Retail Group to its employee experience platform
- Average revenue per Reffind customer of $13,388 per annum
- Cash outflows of $1 million
- $3.7 million cash at bank, plus additional $2 million that was recently raised for $5.7 million total
The biggest disappointment to the market today was clearly the revenues, which are anaemic and haven't seen the kind of step-change necessary to justify recent valuations of the company. As it stands, a $10 million market cap may still be too high for a company making around $700,000 in annualised revenues.
Yet the company's cash position likely also attracted scrutiny, with approximately $5.7 million cash at bank. Reffind burned through just under $1 million in cash during the quarter, and today's cash balance is enough for less than 18 months of operations even before the ramp-up of expenditure to $400,000-$450,000 per month commences. Future capital raisings could be devastating for shareholders, given the depressed share price.
A positive is that Reffind intends to focus on sales and marketing rather than product development in future quarters, and this is expected to drive revenues and customer numbers in coming months. Under a new pricing model, the base annual revenue per client is expected to be around $30,000, just over double the current average.
A number of other unprofitable tech businesses like Newzulu Ltd (ASX: NWZ) and 1-Page Ltd (ASX:1PG) have also come under heavy scrutiny recently as a result of their constant cash outflows and limited revenues, and Reffind is cast from the same mould. This article here clearly illustrates the risks of purchasing unprofitable tech stocks.
Today's update was disappointing, and I'm fence-sitting on whether to sell my remaining Reffind shares. The company needs a step-change in earnings in order to justify its expenditure, and if it can't deliver one soon I will likely sell out before the company can attempt to raise capital again.
