Warren Buffett is among the most successful investors of all time. As such, it’s not entirely surprising that so many investors watch his every move and cling to his every word.
So what about RC365 (LSE:RCGH)? Well, the stock has been on fire, and it’s now up 700% over 12 months. And as far as we know, Buffett hasn’t invested in this small-cap stock.
But does this company meet his criteria? Let’s take a closer look.
Who is RC365?
RC365 Holding is a fintech solutions service provider based in Asia and listed on the London Stock Exchange. It offers services relating to the supply of payment gateway services that allow online retailers to trade.
The surge in the stock’s value can be attributed to various factors. RC365 recently unveiled several significant developments, including strategic partnerships with APEC Business Services and a promising memorandum of understanding (MoU) with the Hong Kong-listed Hatcher Group to explore the application of artificial intelligence (AI) solutions.
However, some speculation surrounds the surge. An article titled ‘Missed Nvidia? This London AI stock could jump over 1,000%’ gained considerable attention across different online platforms last month, potentially triggering more interest in the stock. Interestingly, the article appeared to be sponsored and authored by multiple individuals.
Buffett’s criteria
Buffett looks for certain characteristics when considering to add a company for his portfolio. These criteria are:
- Strong Business Model: Buffett looks for quality companies, with understandable business models, and a competitive advantage.
- Attractive Valuation: the ‘Oracle of Omaha’ seeks companies that trade at a discount versus their intrinsic or book value.
- Earnings Consistency: companies with consistent and predictable earnings growth over time are favoured by the Berkshire Hathaway boss.
- Competitive advantage: a strong brand, proprietary technology, and high switching costs for customers, are just some of the characteristics than can provide a company with a competitive advantage.
- Management: Buffett looks for stocks with competent and shareholder-friendly management teams.
- Strong financials: Buffett is attracted to companies with low debt levels and robust cash flow.
Does RC365 make the grade?
So, does RC365 fit the Buffett bill? In short, ‘no’. I think it has very few of the characteristics that Buffett would be looking for in an investment. On a positive note, the company announced last week that annual revenue increased by 109% to HK$16.9m (£1.6m) versus 2022.
However, we have little evidence of sustained revenue growth, and the company is loss-making. It’s also worth highlighting that companies with £1.6m in revenue are unlikely to have a competitive advantage in the payments sector.
Moreover, there’s very little concrete information about the impact of these recent developments on future business performance. It may be the mention of AI that got investors interested, but its dealings with Hatcher Group only go as far as an MoU.
Finally, we know that Buffett is a value investor, and with RC365 trading at 80 times sales, it’s one of the most expensive stocks I’ve ever seen. Certainly not something we’d expect Buffett to consider.
Combine that with the fact that CEO Chi Kit Law holds a substantial 69.75% of the issued share capital — and thus has the capacity to influence the share price significantly — it looks like a highly unattractive investment.
