Some All Ordinaries (ASX: XAO) shares, or ASX All Ords shares, have suffered from significant declines over the past year.
Just look at some of the worst declines in the past 12 months.
The Appen Ltd (ASX: APX) share price has dropped around 60%.
The Brainchip Holdings Ltd (ASX: BRN) share price has fallen more than 60%.
The Zip Co Ltd (ASX: ZIP) share price has fallen 56%.
Certainly, we're in a very different world compared to two years ago.
The problem for each of these businesses is that investors are not willing to pay anywhere near as much following interest rate rises, as well as some company-specific issues.
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Why do interest rates matter?
One of the world's greatest investors Warren Buffett once said this about interest rates:
The value of every business, the value of a farm, the value of an apartment house, the value of any economic asset, is 100% sensitive to interest rates because all you are doing in investing is transferring some money to somebody now in exchange for what you expect the stream of money to be, to come in over a period of time, and the higher interest rates are, the less that present value is going to be. So every business by its nature … its intrinsic valuation is 100% sensitive to interest rates.
When debt costs almost nothing, it's easy to justify investing in high-risk businesses that appear to have a lot of growth potential.
Now risky ASX All Ords shares have to justify that they can succeed in this new financial era of higher interest rates.
Profit question
A key question for me is – how much is a business worth if it's making losses? If there's a path to profit for the business as it gets bigger then it's easy enough to say that short-term losses are fine.
The idea of being in business is to make a profit. I'm not going to claim to be an expert on the bull case of each ASX All Ords share, but it's clear some aren't where they want to be.
In the latest quarter, BrainChip saw a US$4.1 million operating cash outflow and it ended the period with US$21.8 million of cash. Each company update talks of engagement with potential customers, but its cash inflows from customers were just US$0.83 for the quarter. If it keeps burning through cash, it will have to keep raising capital, further diluting existing shareholders.
Appen is aiming to exit FY23 with a return to underlying earnings before interest, tax, depreciation and amortisation (EBITDA) profitability on an annualised, run-rate basis thanks to cost reductions if "current conditions persist throughout the year". However, so far in 2023 to April, underlying EBITDA was a loss of $12.4 million.
Zip said in its most recent quarterly update for the three months to June 2023, it's aiming to improve its cash EBTDA by up to 50% in the second half of FY23 compared to its first half cash EBTDA loss of $33.2 million. Zip said that it had $57.3 million of cash and liquidity at June 2023.
My 2 cents on the ASX All Ords shares
I'm not in a position to be able to say if BrainChip is going to be able to deliver on the potential that some investors think it has because of the nature of the technology that it's developing. But it's clear that the business is continuing to burn through cash, so it doesn't have long to improve that situation before needing more cash.
Appen has gone through so much pain since 2020. It says it's going through headwinds, yet the large US tech players seem to be going from strength to strength. Appen's appeal seems to have been lost for both clients and investors.
However, it's working on diversifying its revenue and improving profit. If it can get back to profitable growth and make a bottom-line profit again, it could be cheap at this beaten-down level. But, it has a lot of work to do to stop making net losses after tax.
Meantime, Zip is still growing transaction volumes each quarter and its margins have improved. Will that be sustainable in this high-interest rate environment? Plus, how bad will arrears get? Commsec estimates suggest Zip isn't going to make a net profit in the next two financial years. Regulations could also slow growth.
I'm not looking to add any of these names to my portfolio. If I had to choose one, I'd go for Zip because it is still delivering growth. To me, BrainChip and Appen have a lot of work to do to convince clients to use (more) of their offerings.
