Every now and then, a stock seemingly explodes out of nowhere. Right now, Avalon GloboCare (NASDAQ:AVCO) seems to be that stock. AVCO stock finished 2018 at $2.75. That same Avalon GloboCare stock closed Monday at $6.93, after touching $12 last week.
It’s not at all clear what’s driving the huge gains. Indeed, Will Healy wrote last week that the movement in AVCO stock was a mystery.
There is an apparently interesting opportunity in the company’s efforts in the exosome space. But questions surround how the company is attacking that opportunity — and why investors value AVCO at some $500 million.
The AVCO Stock Story
Avalon Globocare was incorporated as Global Technologies, and issued its first Form 10-K in February 2016. At the time, the company had 7 million shares outstanding and zero employees. The K cites a plan to develop back office software, which sounds roughly like the business model of Square (NYSE:SQ).
In 2016, the company executed a reverse split and changed its name to Avalon GloboCare. The company that was a software developer now had a multi-pronged medical strategy. AVCO would develop an “Avalon cell” platform, with four different programs.
One was a focus on CAR-T immunotherapy; remember that Gilead Sciences (NASDAQ:GILD) bought CAR-T leader Kite Pharma for $12 billion last year. Beyond “Avalon cell,” AVCO also noted a potential telemedicine opportunity, and a rehabilitation offering in China. And it cited the potential for M&A, joint venture and consulting opportunities.
Last year, the company acquired 60% of GenExosome Technologies for $1.3 million in cash and 500,000 shares. It also acquired property in New Jersey, with rental income contributing to revenue, along with consulting. And this week, GenExosome announced the discovery of the “world’s first saliva-based exosomal biomarker,” which potentially could be used in detecting and treating oral cancer.
If that pans out, the opportunities could be huge, so it does seem like Avalon GloboCare is making some progress. But there are some very real questions here.
Strategic Questions for Avalon GloboCare
The most obvious question surrounding AVCO stock is why, exactly, the company is supposed to be successful. This is a company that closed the third quarter with $3.8 million in cash. That’s barely enough to support any of the company’s initiatives: indeed, the company has free cash flow of negative $3.6 million in just the first three quarters of this year, per the 10-Q.
So why the multiple efforts? And what is Avalon GloboCare’s edge in any of them?
Meanwhile, the strategy per the most recent 10-K seems to go even further. The company cites an “initial component” of its strategy as “acquiring and/or managing fixed assets including healthcare real estate as well as stem cell banks.” This comes after the company – which, again, has less than $4 million in cash – spent over $7 million to purchase, rather than lease, its New Jersey headquarters.
The overall strategy here seems unfocused, to say the least. Is the company a consulting firm? A real estate management company? A drug developer? It’s not clear. To be sure, Exosome technology in theory has promise: one analyst called the category “the rising star in drug delivery.” And Bio-Techne (NASDAQ:TECH) paid $250 million in cash, plus contingent consideration, for Exosome Diagnostics last year.
But Avalon GloboCare doesn’t even seem to be focusing on that opportunity. And a company that does many things isn’t likely to do any of them well. Meanwhile, with less than $4 million in cash, there clearly isn’t enough to properly support any of these efforts. That means an AVCO stock offering likely is on the way. But it also suggests that Avalon GloboCare stock could be notably overvalued.
The Valuation of Avalon GloboCare Stock
It’s impossible to evaluate AVCO stock through pure fundamental analysis. Revenue outside of property rental is just $370,000 so far this year.
But what figures we do have suggest that a stock price near $7 is somewhat foolish. The 60% stake in GenExosome was acquired for $1.3 million in cash and roughly $1 million worth of stock. If that business is driving the recent optimism, why was such a valuable business sold for an implied valuation of $4 million?
Avalon GloboCare itself sold stock last year — at $1.75 and $2.25. Even acknowledging that small-cap companies have to execute offerings at a substantial discount, Avalon GloboCare issued stock at barely one-fourth the current price. Between M&A and the equity offering, nothing AVCO itself has done suggests that the company believes it should be worth roughly $500 million.
That’s the current market capitalization of AVCO, based on the quarter-end figure of 72.573 million shares outstanding. Investors should note that AVCO — which hasn’t really accomplished anything, and which has significant financial and strategic questions — now is worth more than Exosome Technologies when it was bought out, even accounting for the present value of the contingent consideration.
That seems aggressive for a company with basically one accomplishment of note. That’s particularly true given that as recently as 2015 the company was trying to develop software.
How the rest of this story will play out is unclear, admittedly. But it does seem already like the absolute best-case scenario is priced in.
As of this writing, Vince Martin had no positions in any securities mentioned.