Beware the RC365 share price bubble

I believe the RC365 share price is showing all the signs of an unsustainable bubble. But it might take a while before it bursts.

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The RC365 (LSE:RCGH) share price is now 1,235% higher than when the company floated in March 2022, with a value of £6.7m.

But for the first 14 months of its life as a listed company, its stock price barely moved. Only since June 2023 has it really started to take off, growing by nearly four times.

On the up

The company’s principal business is the provision of secure payment gateway solutions to customers in Hong Kong and China.

But it’s still very small. For the year ended 31 March 2023, it generated revenue of HK$16.8m (£1.68m) and made a loss before tax of HK$5.4m (£540k).

The meteoric rise in its share price means it now has a stock market valuation of £117m, over 17 times’ its IPO value.

A bubble occurs when there’s a large differential between a company’s market cap and that of its underlying value. And I believe the recent movement in the RC365 share price is demonstrating all of the associated characteristics.

Bubble theory

In 1986, Hyman Minsky published a book Stabilizing an Unstable Economy. It identified five stages of a typical credit cycle that are equally applicable to individual stock prices.

The first phase of a bubble is displacement. This occurs when investors get excited about something. In the case of RC365, it appears to be artificial intelligence (AI).

On 1 June 2023, the company announced that it had signed a memorandum of understanding with Hatcher Group to incorporate “AI solutions” into its applications.

Its shares immediately entered Minsky’s second phase — boom — increasing by 16%.

That’s a massive rise on the back of an announcement that’s non-legally binding and doesn’t mention any numbers.

The share price continued to rise steadily.

Euphoria (stage three) took over between 16 June and 20 July 2023, when the share price went from 23p to 164p. A rise of 713% in just over a month is remarkable.

Investors were apparently smitten.

In July 2023, despite being the 812th largest listed company in the UK, it ranked 173rd in terms of the number of deals placed. This was more than the trades for established companies such as Games Workshop, Greggs, and Dr Martens.

What next?

But have we now entered the fourth stage (profit-taking) of Minsky’s cycle?

This is when investors cash out, having made some impressive gains. They are nervous that the good run won’t continue.

There’s some evidence to suggest this might be the case. The company’s shares are now changing hands for 48% less than their peak.

However, we appear to be a long way from the final — panic — phase.

Indeed, we might never get there.

Final thoughts

Personally, I think RC365 is a company with excellent growth prospects but one that’s massively overvalued.

On the plus side, it regularly announces agreements with new customers and is clearly expanding. The company recently secured its first client in Malaysia. And its going to develop a new wealth management app.

But it remains loss-making, which, despite its contract wins, makes its current valuation hard to justify.

However, as long as the steady flow of good news stories is maintained, goodwill towards the company will be maintained.

But I don’t like bubbles and I’m nervous that the company’s share price is currently way ahead of its underlying value.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Beard has no position in any of the shares mentioned. The Motley Fool UK has recommended Games Workshop Group Plc. 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.

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