RC365 (LSE:RCGH) shares have soared this year. It’s the best performing UK stock. It’s up 700% over 12 months and much of this growth has come in the past two months.
For me, it’s not so much a question as have I’ve missed the rally, but when will this stock crash? As I, and some of my fellow Fools, have highlighted before, there’s very little supporting RC365’s valuation growth.
Why RC365 surged?
RC365 has been making recent headlines with a series of notable deals. These include a memorandum of understanding with Hong Kong-listed Hatcher Group, focusing on providing artificial intelligence (AI) solutions.
The fintech solutions service provider also announced partnerships with APEC Business Services and acquired Mr Meal Production Limited. But it’s likely the reference to AI in the Hatcher Group really triggered investors’ interest.
It appears that a potentially sponsored article titled ‘Missed Nvidia? This London AI stock could jump over 1,000%‘, may also be responsible for the increased interest in the stock. The article has been attributed to various authors.
The valuation
RC365 remains a loss-making enterprise, as evident in its annual accounts for the year ending 31 March. The company reported a significant expansion in losses, reaching HKD5.4 million (£530k), marking a 38% increase from the previous year’s HKD3.9 million.
This contributes to an unattractive valuation. The current price-to-sales (P/S) ratio for the company stands at around 90 times, making it exceptionally expensive. Traditionally, a P/S ratio of around 10 is considered costly, but RC365’s current valuation far exceeds this benchmark, raising concerns about its financial standing and market valuation.
And this valuation cannot be supported by any of the recent deals we’ve seen. While there are potential upsides from these developments, there’s very little concrete or measurable.
In turn, we can also observe that RC365 has little in the way of a competitive advantage versus its peers — well, as far as we know. In fact, it’s among the smallest of the payment gateway companies and there’s no evidence to suggest it owns technologies that others don’t.
So when might it crash?
Indeed, while a crash is not an absolute certainty, the current valuation appears unsustainable in the long run. Several factors need consideration in this regard, including market sentiment, earnings performance, and owner deals.
Market sentiment has been somewhat unstable and a full-blown crash could be triggered by downward pressure, especially since there seems to be no significant support level from a trading perspective.
Moreover, a disappointing earnings report could be a catalyst for a downward spiral as investors realise the speculated growth may not materialise as anticipated.
Furthermore, concerns about the concentration of share capital add to the uncertainty. With CEO Chi Kit Law holding a substantial 69.75% of issued shares, the potential for a sharp decline in the share price exists if Law decides to sell some of his holdings to capitalise on the soaring share price.
Overall, while a crash is not inevitable, the prevailing conditions raise questions about the sustainability of the current valuation and the potential risks associated with the stock.
