RC365 (LSE:RCGH) shares skyrocketed in July, advancing 80%. The rally extended gains made in the early summer months. At the time of writing, the stock is up 663% over six months, and 886% over one year.
Like many investors right now, I’m wishing I’d invested in this stock… despite never having heard of it a month ago. But am I too late to get involved? Personally, I’m expecting a substantial correction, and it could come as soon as next week. Here’s a few things worth pondering.
Speculation or shrewd investing
There have been several catalysts for the explosion of the share price. RC365 has recently announced various deals, including a partnership with APEC Business Services and the acquisition of Mr Meal Production Limited. It also highlighted that a memorandum of understanding had been reached with Hong Kong-listed Hatcher Group, relating to the provision of artificial intelligence (AI) solutions.
However, as my colleague Edward Sheldon highlighted, much of the share price growth may be linked to a possibly sponsored article entitled, “Missed Nvidia? This London AI stock could jump over 1,000%”. The article, which was posted wildly around the internet, strangely by different authors, seemed to generate interest in the stock.
Data doesn’t support valuation
Well, we have fairly limited financial data to substantiate the rise in the share price.
On Wednesday, RC365 released its annual accounts for the year ending 31 March, reporting a significant increase in revenue by 109% to HKD16.9m (£1.6m) compared to HKD8.1m in 2022. However, the company’s losses expanded by 38% to HKD5.4m (£530k), up from HKD3.9m in the previous year.
Despite this, the company’s net assets saw a substantial growth of 63% to HKD31m (£3m), compared to HKD19m in 2022. Additionally, as of 31 March 2023, RC365 had cash and cash equivalents amounting to HKD9.5m (£900k), which had decreased from HKD23.4m a year previous.
Nothing here indicates that RC365 is trading at fair value. Based on the above data, we can observe that it trades with a price-to-sales ratio of 100 — a P/S ratio of 10 is considered very expensive.
Low float & concentrated holdings
RC365 has a low float, resulting in a limited number of shares available for trading. In turn, this can lead to increase stock volatility and as well as a sizeable spread.
Additionally, we can observe that CEO Chi Kit Law holds a substantial 69.75% of the issued share capital. This grants him significant influence over decision-making but also power over the share price.
Investors may wish to be wary of Law’s possible desire to cash in on this soaring share price. If he were to sell a small proportion of his holdings, it could have a significant negative impact on the share price.
Investor or trader?
As someone investing for the long run, I see that RC365 has almost no hallmarks of a successful investment. It’s a loss-making company, with a valuation that is very hard to justify based on some deals I don’t truly understand. A crash could be on the cards! It could be as soon as next week or even tomorrow.
This post was originally published on Motley Fool
