Penny stocks are notorious for their volatility. And one company that seems to be grabbing a lot of attention today is RC365 Holding (LSE:RCGH). The shares exploded nearly 800% between the start of 2023 and July! And while the stock has since pulled back significantly, year-to-date, the market cap is still up around 330%.
What’s behind this explosive growth? And has the recent lull in momentum created a buying opportunity for investors?
Investigating the business
The sudden spike in popularity earlier this year was based on the possibility that RC365 is an upcoming AI business. And with other AI stocks surging over the same period, it’s not surprising that the company got caught up in the excitement.
Yet those who bothered to look closer would have realised that artificial intelligence and RC365 aren’t really connected.
An announcement was made that the firm had signed a contract with Hatcher Group to collaborate and develop AI-powered solutions. But apart from the fact this deal doesn’t mention any numbers, it’s also not legally binding. In other words, it may not add any meaningful value to the business. Yet that didn’t stop the shares from jumping in double-digits on the day.
So, what does RC365 actually do? It’s a payments company. The group is a holding firm for Regal Crown Technology, which operates online and offline payment gateways in China and Hong Kong. It also provides additional IT support services and other fintech products to assist in wealth management.
As a business, the group seems to be in decent shape. Its services are generating revenue, and while it’s not a profitable enterprise yet, there appears to be ample liquidity on the balance sheet to keep the lights on. That’s already better than most penny stocks in the UK.
A buying opportunity?
The business model may be structurally sound. But even with the aggressive contraction in valuation, a buying opportunity is not what I’d call today’s share price.
At around 80p, RC365 boasts a market capitalisation of £90m. By comparison, revenue for its 2023 fiscal year ending in March landed at HK$16.8m. While that’s more than double versus a year ago, it’s still only £1.69m. In other words, RC365 shares are trading at a price-to-sales ratio of 53. By comparison, the stock market average is usually between 1 and 2.
There’s no denying it has the makings of a good company. Even more so, given the recent contract wins across Asia place it on a path to potentially explosive long-term growth. However, the penny stock still has plenty to prove, especially if it intends to justify its current valuation. Personally, I think expectations are far too high, making RC365 look, in my eyes, like a bubble waiting to burst. With that in mind, I believe investors will be well-served to steer clear of this enterprise.