The Versarien (LSE:VRS) share price has been pretty volatile recently. This year, the company saw its stock price surge from 45p to over 70p in early January, only to fall back again a month later. And looking over the past 12 months, it has fallen by around 20%.
Last week, the VRS share price once again surged by over 20% within 24 hours. Seeing this level of volatility in young public businesses is not uncommon. But what caused this sudden growth? And should I be considering Versarien for my portfolio as a long-term investment?
Last week’s explosive growth
I’ve explored Versarien’s business before. But as a quick reminder, it’s a specialist materials manufacturer for the industrial sector. Operating through eight subsidiaries, it develops and commercialises new materials used throughout multiple industries, including aerospace, energy, and electronics.
A few months ago, the management team completed an acquisition in South Korea to expand the firm’s production portfolio to include graphene-based materials. It seems this decision was quite prudent. Why? Because last week, Versarien announced it had signed a series of agreements with another South Korean graphene company called Graphene Lab Co. This appears to be the main catalyst behind the surge in the VRS share price. So what do these agreements entail?
Firstly, Graphene Lab can now utilise 14 patents from the previously mentioned acquisition to develop their own products. In exchange, Versarien will receive a 5% royalty fee on each resulting product sale. Furthermore, Graphene Lab can also use certain trademarks owned by Versarien in exchange for a 2% royalty fee. These are hardly impressive percentages. But it does mean that the firm has just gained another much-needed revenue source, with no operational expenses involved.
However, these royalty agreements are not the end of the story. Graphene Lab has also purchased a 15% stake in Versarien’s South Korean subsidiary, consequently flooding the balance sheet with an additional £1.93m of cash. With a nice boost of liquidity to hand and two new expense-free revenue streams, I’m not surprised to see the VRS share price take off.
The Versarien (VRS) share price has its risks
Despite the promising progress Versarien’s management team has made, this business is far from risk-free. The firm is still unprofitable with no clear timetable as to when that might change. Therefore, it remains largely dependent on outsiders to raise additional capital. This latest share deal with Graphene Lab certainly provides some nice liquidity. But that money will likely run out before Versarien’s bottom line turns positive.
The volatility of the VRS share price is also a bit of a concern. Investors’ expectations surrounding young companies can often lead to absurd valuations. Looking at its peak in January this year, the market capitalisation of Versarian reached around £140m despite only generating £8.3m in gross revenue. Today the business is priced at about £75m, which is certainly more reasonable but still carries a high level of investor expectations. Needless to say, if the business fails to deliver, the VRS share price could fall once again.
Overall, Versarien looks like a promising company. Having said that, I still think it’s too soon to invest. Therefore it’s staying on my watch list for now.
Zaven Boyrazian does not own shares in Versarien. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.