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3 reasons I’m avoiding Resapp Health Ltd at all costs

A good friend of mine told me yesterday that he was looking at buying shares in Resapp Health Ltd (ASX: RAP). Taking care not to cross the line into giving personal financial advice, which I cannot provide, I did my best to convey that I thought the company was overpriced and very high-risk.

I personally am avoiding Resapp at all costs, and here is why:

  • Wildly overpriced

According to its half-year report, Resapp has ~650 million shares on issue, giving it a market capitalisation of ~$210 million at today’s share price. It has $10 million in cash and is burning around $7 million a year.

I take the view that buying even 1 share is the same as buying the company. Think of it this way – by buying Resapp shares today you are saying:

‘I am paying $210 million for a business with $10 million in cash, that is earning $130,000 in sales per year and losing $7 million per annum. This is a great price for such a business.’

Motley Fool Hidden Gems analyst Claude Walker wrote a pair of articles about the company last year demonstrating how much Resapp would need to earn to justify today’s valuation. It does not matter how good the science is; at Resapp’s stage of development, without a track record of successfully selling its product, the company is very high risk.

  • Time to become profitable

Resapp was targeting US FDA approval in the first half of 2017, this has been pushed back to the 3rd quarter. If this is achieved at that time, I would assume that it will take well over 1 year after this for Resapp to become profitable.

The company has yet to invest in a marketing and sales team, plus support services for customers and so on. This will put costs up significantly and I would fully expect it to take longer than 2 years to reach break-even; there is a moderate to good chance the company will need to raise capital again (i.e., selling more shares, and diluting current shareholders).

Whether the company can live up to its potential or not, buyers today are paying for multiple years of growth in the future that may or may not occur. In my view, many buyers of this type of early-stage company are not psychologically prepared for the years of losses they may have to wear before profitability occurs.

  • Plenty of attractive alternatives

Resapp is not the only attractive company at this size and stage of growth. Instead of buying Resapp for $210 million, you could also choose something like Nearmap Ltd (ASX: NEA) which has a $230 million market capitalisation but is set to earn ~$40 million in revenue this year.

Nearmap is also a loss-making company, but it is well ahead of Resapp in terms of its development, and it is pouring cash into growing sales. Investors can see that Nearmap’s business model is already proven to work and that the company enjoys very high margins.

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Motley Fool contributor Sean O'Neill owns shares of Nearmap Ltd. The Motley Fool Australia owns shares of Nearmap Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.