As of this writing, cryptocurrencies are selling off. Recent remarks from Elon Musk may be the cause. Even with recent volatility, I remain a long-term bull on crypto. Yet, don’t take that to mean I’ve changed my mind about SOS Limited (NYSE:SOS) stock.
Back in March, I made the case why you didn’t need to be a crypto bear to avoid this Bitcoin (CCC:BTC-USD) mining play. That is, while this alternative asset class has big long-term potential, this dodgy stock was clearly a name to stay away from.
Flash forward two months, and that remains to be the case. Even as fading interest in cryptos mining plays, along with BTC’s recent performance, have knocked down this stock substantially.
Crypto prices can be a double-edged sword for mining plays like this one. If underlying prices go up, stocks like this one go up even higher. The reason? Operating leverage. With most of its costs fixed, an increase in prices results in much more of the increase falling straight to the bottom line. On the flipside, though, is that falling prices make a larger impact (in a bad way) on profitability.
But, no matter the future direction of Bitcoin, this stock is still in trouble. With other concerns at hand, not just underlying crypto price, the best move continues to be, “stay away.”
SOS Stock Has More Room to Fall
It’s too early to tell whether the aforementioned crypto selloff will continue. Or if it’s merely a case of short-term volatility. But whether major cryptocurrencies recover or not, SOS Limited has more room to fall.
How so? For starters, shares may have fallen 35% in the past month, and around 80% off their highs. But its valuation still doesn’t make much sense. Based on its share count, SOS has a market capitalization of around $560 million at today’s prices (around $3.10 per share). Compared to its 2020 revenues (around $49.5 million), that’s an insane valuation.
Even compared to its own projections for this year (286% revenue growth, to around $191 million), much of its possible revenue growth (which hinges on both high Bitcoin prices, and the company successfully getting its new mining rigs online) is factored into its share price.
Now, if crypto prices bounce back, we may see less dramatic day-to-day price declines for SOS stock. But, valuation is not the only issue at hand. There are other concerns at play as well. Some of these are more general, and apply to all crypto mining plays. Others are company-specific. Either way, as the bullishness for this stock among speculators has long since dissipated, these issues will add more downward pressure on the stock.
Many Risks Remain
You can split the risks with this stock into two categories: industry specific and company specific. By industry specific, I mean risk inherent with any sort of Bitcoin mining company. First, of course, is the possible outsized losses from falling crypto prices, countering any outsized windfalls from rising prices. Second, is the fact crypto mining isn’t a license to print money.
As I put it when talking about another major publicly traded company in this space, crypto mining isn’t a “set it and forget it” type of operation. And, I’m not just talking about the possible challenges that come from procuring mining rigs, which due to the boom in crypto, are in scarce supply. There’s the “difficulty rate” factor as well. That is, over time, it takes greater and greater computing power to “mine” for Bitcoin. In turn, rising difficulty rates means miners like this one will likely end up mining fewer coins than previously projected.
So, what about company-specific risks? I’m referring to the many accusations vocal short sellers have made about the company over the past few months. Sure, short sellers have an objective. Some of their claims may have been overblown. But given that the company itself admitted that some of what the shorts accused it of was true, there’s credence to the claims that not everything with this company is on the up-and-up.
Putting it another way, the fact that this miner has a lot more red flags than its rivals further makes the case that it’s a “steer clear” situation.
The Bottom Line? Avoid SOS Limited.
Only time will tell whether Bitcoin mining companies at large can live up to expectations. Even if crypto prices recover, and continue to head toward higher price levels, factors like the difficulty rate still make it uncertain whether this space will end up a highly profitable industry.
On top of overall concerns about crypto mining plays, SOS stock comes with a grab-bag of its own issues. Between a rich valuation, and the red flags surrounding it, this remains a name to avoid. Even if Bitcoin bounces back.
On the date of publication, Matt McCall held a position in Bitcoin.
The InvestorPlace Research Staff member primarily responsible for this article held a position in Bitcoin.
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