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rc365 (LSE:RCGH) share has declined heavily from its high of around 150p. At the time of writing, the stock is trading at just 80p, back in penny territory.
So are we looking at an undervalued gem? I do not think so. let’s take a closer look.
it’s all speculation
Shares of RC365 are up 302%, despite falling from their highs in mid-summer. So why is it so?
Well, there’s no clear logic to the boom. However, the company has made several announcements this year that should have piqued investor interest.
The first of these was an MoU with Hong Kong-listed Hatcher Group, The MoU focuses on providing AI solutions.
And this was followed by a potentially sponsored article titled Nvidia missed out? This London-based AI stock has the potential to achieve remarkable gains of over 1,000%,
AI has been a real buzzword for investors this year, so it’s possible that some speculative investors see RC365 as a company to take off.
It could have been a self-fulfilling prophecy. As recently as mid-June, RC365 had a market capitalization of around £25m. In addition, CEO Chi Kit Law holds 69.75% of the issued shares.
This means that even a limited increase in share activity by non-insiders would be enough to generate momentum.
Why is it falling?
Well, there was little reason for the stock to rise in the first place. So it’s no surprise to see the stock drop. In fact, I and all of my colleagues predict that the stock will take a huge hit.
One negative effect on the share price was the July 26 earnings report. The stock, already trending downwards, fell from 123p on 26 July to 94p on 28 July. I’m surprised it didn’t drop more. But after all, the fundamentals were never the driving force behind the stock boom.
During the year to 31 March, the firm’s revenue doubled to HK$16.9m (£1.5m), but is still negligible. Losses also increased significantly during this period, rising from HK$3.9m in the previous year to HK$5.4m (£530k).
more to fall
Speculation is rarely enough to maintain an expensive stock. And the RC365 is incredibly expensive. The Hong Kong-based company currently trades at 66 times revenue.
Thus, RC365 is one of the most expensive stocks I have come across. It’s worth considering that a price-to-earnings ratio of 10 is generally considered very expensive.
Furthermore, the macroeconomic environment is certainly not conducive for growth right now. RC365 provides secure payment gateways and IT solutions to clients in Hong Kong and China, and this should raise concerns for some investors.
While China may be attractive in the long term, the economy certainly faces growth challenges. This may not be the best backdrop for a growth-oriented IT firm.
It’s highly likely that we’ll see RC365 give back much of its gains in the coming weeks as there’s little argument for its current share price. I would not be surprised to see the stock return to 20p per share later this year.
Post Down 33% in 1 Month, Are RC365 Shares an Unforgettable Steal? appeared first on The Motley Fool UK.
James Fox has no position in any of the stocks mentioned. The Motley Fool UK has no position in any of the stocks mentioned. The views expressed on the companies mentioned in this article are the author’s own and therefore may differ from the official recommendations made in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a wide variety of insights can make us better investors.
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