SOS Stock Is Both Way Overvalued and Too High-Risk to Take a Chance

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Crypto mining stocks are the net beneficiaries of the amazing Bitcoin (CCC:BTC-USD) bull run that shows no sign of stopping. However, one that often gets lost in the shuffle is SOS (NYSE:SOS) stock.

Source: Mark Agnor / Shutterstock.com

The company mined its first bitcoin at the end of February, and investors are now betting big that they may have a multi-bagger on their hands.

However, a word of caution. Although the company is installing crypto-mining machines rapidly, we still need to see some solid fundamentals to justify SOS stock rising more than 250% year-to-date.

In March, it installed its second fleet of 5,000 cryptocurrency mining rigs bringing total capacity to 353 Peta-Hashes per second (PH/s) for mining Bitcoin and 707 Giga-Hashes per second (GH/s) for mining Ethereum (CCC:ETH-USD).

For the first quarter, the company expcects to generate at least 41 Bitcoins and 909 ETH, but the important thing to note here is that it will need to continue building capacity. SOS remains heavily dependant on crypto prices to remain stable or rise in the foreseeable future.

The company has also issued a lot of equity recently to fuel its expansion. Considering SOS needs to keep building capacity, investors should get used to these dilutive equity issues.

In summary, SOS is an exciting albeit risky company. You stand to make a lot of money or get completely wiped out with your investment. Hence, you should only invest the money that you are willing to lose.

There Is Substance Behind SOS Stock

Bitcoin mining stocks have gained rapidly in the last several months. Investors with a degree of risk tolerance have made healthy gains, and there is nothing to suggest the trend will let up.

However, even amongst crypto-mining stocks, you will find hits and misses. SOS, in particular, seems a stock that is still finding its feet in the crypto space. The Chinese software company has been listed on the NYSE since 2017 as American Depositary Shares, or ADSs.

Its core business focuses on rescue financing in health, insurance, and financial services, among other areas. On a bright note, this area of the business is successful and cash flow positive.

Unfortunately, as with several other companies in recent times, such as Riot Blockchain (NASDAQ:RIOT), SOS has decided to add crypto-miners to the list of things it does.

However, unlike RIOT, there is one thing that is going for SOS: a track record of success in other business areas. Hence, the enthusiasm surrounding the company is not unfounded since it’s not a fly-by-night operation by any means.

Hindenburg Research learned this the hard way. The short-seller made several allegations against SOS. Hindenburg has a history of taking down high-profile targets, electric truck maker Nikola (NASDAQ:NKLA) being a prime example. Yet, this time they came up short, pardon the pun.

Scorpio Venture Capital came out with a rebuttal, and the skepticism surrounding the allegations has since dissipated. The bottom line, the company is legitimate.

Betting on a Risky Investment in a Risky Sector

At this point, you don’t need me to tell you investing in crypto is fraught with risk. Despite bitcoin prices steadying, a monumental drop could always be around the corner.

Plus, crypto mining is an expensive investment. It requires a healthy amount of capital that needs to be replenished regularly. According to SEC filings, from Dec. 22, 2020, to Feb. 18 SOS issued equity on six separate occasions. It raised another $125 million recently through the issue of 25 million ADRs at $5 per ADR.

You cannot blame the company for taking advantage of the crypto bull run. However, all this dilution is bound to catch up with the SOS stock price.

There is also the small matter of crypto prices. Although they are more stable now than a year ago, it remains a precarious proposition to invest in the space. SOS, for its part, remains committed.

On March 24, the high-technology company revealed it had purchased the license to use a blockchain asset exchange software system for building a digital asset exchange.

“This is a key step in our blockchain and cryptocurrency strategy,” Chairman and Chief Executive Officer Yandai Wang explained. “The digital asset exchange is an important part of our goal to provide blockchain services, digital asset security services, and Decentralized Finance (DeFi) services.”

Alongside its mining purchases, this is good news for SOS stockholders, but, as I’ve outlined, the risks remain high.

SOS Is Overvalued Considering the Risk

For the risk that you are undertaking, SOS stock does not seem very attractive.

There are several crypto-mining stocks like Hive Blockchain Technologies (OTCMTKS:HVBTF), Marathon Digital Holdings (NASDAQ:MARA) and Hut 8 (OTCMKTS:HUTMF) that you can invest in to play this space.

These come with their own set of risks and are also overpriced like SOS — Hut 8 is the cheapest at 24 times price-to-sales.

Shares will keep spiking on occasion considering the sector in which the company operates. However, we need more of a long-term story to confirm the investment as a good one.

Until then, only play with the money that you are willing to lose.

On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.