Down 33% over 1 month, are RC365 shares an unmissable steal?

RC365 shares are among the most volatile stocks listed in the UK. Now down 33% over one month, is this a stock investors should consider?

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RC365 (LSE:RCGH) shares have fallen massively from their highs around 150p. At the time of writing, the stock is trading for just 80p, back in penny territory.

So are we looking at an undervalued gem? I think not. Let’s take a closer look.

It’s all speculation

RC365 shares are up 302%, despite crashing from their highs in mid-summer. So why is this?

Well, there’s little obvious reasoning for the surge. However, the company has made a series of announcement this year which may have triggered investors’ interest.

First among these was a memorandum of understanding with the Hong Kong-listed Hatcher Group. The MoU centres around delivering an AI solution.

And this was followed by a potentially sponsored article titled Missed Nvidia? This London-based AI stock has the potential to achieve a remarkable surge of over 1,000%.

AI has been a real buzzword for investors this year, so it’s possible that some speculative investors saw RC365 as a company set to soar.

This could have been a self-fulfilling prophecy. RC365 had a market-cap around £25m as recently as mid-June. Moreover, CEO Chi Kit Law holds 69.75% of issued shares.

This means that even a limited increase in share activity by non-insider investors would have been enough to create momentum.

Why is it falling?

Well, there was very little reason for the stock gaining in the first place. So it’s unsurprising to see the stock plummet. In fact, my colleagues and I all forecast the stock to experience a severe correction.

One negative influence on the share price was an earnings report on 26 July. The stock, already on its way down, fell from 123p on 26 July to 94p 28 July. I’m surprised it didn’t fall further. But after all, fundamentals were never behind the stock’s surge.

Over the year to 31 March, the firm saw revenue double to HK$16.9m (£1.5m) but this is still negligible. Losses also increased significantly over the period, amounting to HK$5.4m (£530k), up from HK$3.9m in the previous year.

Further to fall

Speculation is rarely enough to sustain an expensive stock. And RC365 is incredibly expensive. The Hong Kong-based firm currently trades at 66 times revenue.

As such, RC365 one of the most expensive stocks I’ve come across. It’s worth considering that a price-to-revenue ratio of 10 is normally considered very expensive.

Moreover, the macroeconomic environment certainly isn’t overly conducive to growth right now. RC365 provides secure payment gateways and IT solutions to customers in Hong Kong and China, and this should raise some investor concerns.

While China might be attractive in the long term, the economy is certainly facing growth challenges. It may not be the best backdrop for a growth-oriented IT firm.

It’s highly likely that we’ll see RC365 give back more of its gains in the coming weeks as there’s very little reasoning for its current share price. I wouldn’t be surprised to see the stock return to 20p a share later this year.

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 Fox has no position in any of the shares mentioned. 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.

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