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Why I would sell Updater Inc shares at this price

It’s quite easy to decide to buy shares of a company, deciding to sell is a much harder choice.

Updater Inc (ASX: UPD) is a business that helps households in the USA change utilities, forward mail and update accounts. Although the service may be gaining traction, I think it’s time to sell if you have been holding onto Updater shares for a while.

Little revenue and no profit

The business has been operating since January 2011 and in its latest report for the six months to 30 June 2017 it revealed revenue of US$505,017 and a net loss of US$5,732,014.

Revenue may have grown by 196% from US$170,723 compared to the six months to 30 June 2016, but the loss increased by US$2,212,602, which was a 63% increase from the loss of US$3,519,412.

If there’s a clear path to profit then I think it can be worth suffering through short-term losses for long-term gain. However, I think it’s worth being extra cautious of companies with little revenue today but promising big revenue in the future whilst burning through cash.

The business is currently trading with a market capitalisation far in excess of what a value investor would deem appropriate to invest in. The equivalent of 659,852,350 CDIs would imply a market capitalisation of AU$759 million at a share price of AU$1.15.

In its latest quarterly update, the company included the following sentence: ‘Although cash receipts have increased each quarter since listing on the ASX, revenue growth has not been a goal of the company.’ If revenue growth is not a near-term goal, then investors could be waiting a while before the Updater part of the business starts reporting a profit.

An investor needs to ask themselves how much a company is worth today if it’s making a loss? What are the business’ estimates of revenue and profit once it has achieved its target market share?

Foolish takeaway

If you’ve held your shares for a while then it could be time to sell as you’re probably sitting on a good gain and the share price could keep heading down in the medium-term. However, if you think the possible future value creation justifies today’s price, then it could be worth it to keep holding on.

Updater may go on to generate substantial revenue growth and even generate a decent profit, but I think it’s trading at a price beyond what most investors should consider buying at.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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.

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