A small company that has been talked about by a lot of investors in the past few months is RC365 (LSE: RCGH). But amid the enthusiasm of some people for the largely unknown company, there are a few concerns that mean I would not touch RC365 shares with a bargepole.
Here are three of them.
Limited track record
The business has been listed only a few months and has a short trading history that I can look at when trying to assess its track record.
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On one hand, that might not seem like an issue. After all, when investing I look forwards. I buy shares (or not) based on how I feel about a company’s future prospects and its share valuation.
That said, a track record also matters to me.
Although it is not necessarily an indicator of what will happen in future, it can at least demonstrate whether a business has been able to prove its commercial model. Without seeing a proven business model over the course of time, I rarely invest in a business.
Unclear direction
During the boom in SPACs several years ago, investors were piling into investment vehicles that did not always explain how their funds would ultimately be used. Something similar has happened during various speculative bubbles throughout history.
Much of the investor excitement about RC365 shares has not been based on what the business currently does but what it might do in future. As investors have scrambled to get exposure to AI growth stories, RC365 has been a beneficiary.
I think AI could be a major profit driver in coming years. If RC365 finds the right way to ride that boom, it could be good for the company’s revenues and profits.
For now, though, such hopes seem speculative to me rather than grounded in a clear strategy and collection of assets at the company. I would like to wait and see RC365 demonstrate more concrete progress on monetising its AI potential before investing, rather than buying RC365 shares based on hope alone.
Valuation concerns
When buying shares, I like to follow Warren Buffett and hunt for great businesses selling at attractive prices.
So far, I do not think there is enough evidence for me to see RC365 as a great business.
But even if I did, what about its valuation?
For a loss-making company with small revenues, I regard the company’s current valuation as eye-watering. But the main issue is knowing how to value it in the first place. It has no earnings, a small turnover, limited financial history, and is rapidly evolving.
If I feel unable properly to assess a company’s valuation I would not usually invest. That is exactly my feeling right now about RC365 shares. I do not plan to buy any.
Maybe the company will turn out to grow quickly, exploit the AI opportunity profitably, and build a strong position in potentially huge Asian end markets. Along the way, though, there will be other opportunities for me to invest, for example, if the business proves itself more. Why rush when the outlook for the business remains so hard for me to gauge?
