It has been a dramatic few months for shareholders in former penny stock RC365 (LSE: RCGH). The London-listed, Asia-focused digital business has seen its shares shoot up 80% in the past month alone. The RC365 share price is up over 2,000% since the company listed last year.
That sort of jaw-dropping performance has certainly made me curious about the business. Given their incredible track record in recent months, could it make sense for me to add the shares to my portfolio right now?
Risk and reward
In short, my answer is no.
That is because of my personal risk tolerance. Each investor needs to decide what the appropriate balance between risk and reward is for them.
Unproven business
The rapid ascent in the RC365 share price has been massively rewarding already for some shareholders. If I bought now and the share kept going up like that, I also could do well.
But I am not a trader or speculator. I am a long-term investor.
So the question I ask when considering buying a share for my portfolio is whether I think its business potential merits a higher share price than it currently has. I also consider the risks involved.
RC365 has a market capitalisation of over £180m. But in its most recent interim report, revenue came in at well south of £1m. The loss for the period was roughly £300,000.
That is not the sort of proven business I like to invest in – and the valuation looks dizzying to me.
Possible growth driver
Clearly not everyone in the stock market shares my scepticism about the valuation, given the rapid growth we have seen in the share price.
I think that may be because of the buzz around AI stocks. RC365 has announced a plan to tap into AI opportunities. Its Asian focus and Hong Kong team members could give it the opportunity to tap into large end markets in China for AI-enabled apps.
Lots to prove
So far, however, the company’s ambitions look fairly modest. Last week it announced an acquisition, but it was of a company with unaudited annual revenues of around £250,000. That is not the scale of acquisition I think RC365 needs to make to take the AI world by storm.
Admittedly that is only one acquisition. If RC365 uses its capital to make more, consolidates them, and scales up the operations, it could turn out to be a big digital player. At that point it may justify today’s market capitalisation – or a higher one.
But there is a long way to go between here and there, with the possibility that things could turn out less well than the company’s fans hope.
Dotcom echoes
In a way, RC365 and the wider AI stock frenzy remind me of the dotcom era.
Even after Amazon had risen steeply, it still offered huge potential rewards to shareholders once it scaled its business. But a large number of other companies of that time fell by the wayside. For now, RC365 lacks a proven business model or the scale I think to justify its current valuation.
I fear the share price could fall a long way from here if it does not demonstrate a compelling growth plan for its AI ambitions. I will not be touching the company with a bargepole.
