Recently the market appetite in young and volatile shares, such as holographic technology and advertising company WiMi Hologram Cloud (NASDAQ:WIMI) stock, has increased . The company had its IPO in April. On July 9, WIMI stock was trading around $3.5. By July 13, it hit an all-time high of $29.50. Now the shares are flirting with $7.5. That is one rollercoaster ride.
WiMi started operations in China in 2015. In the U.S., WiMi Hologram Cloud stock trades through American Depositary Receipts (ADRs). Today, I’ll take a closer look at the prospects for WiMi Hologram Cloud stock for the rest of the year.
How WiMi Hologram Cloud Stock Makes Money
Beijing-headquartered WiMi Hologram Cloud, “focuses on computer vision holographic cloud service.” The company believes hologram technology will likely have an increasing range of applications in gaming, social media, and communications, especially as 5G becomes part of consumers’ daily lives.
Despite these futuristic-sounding words, the company’s Securities and Exchange Commission (SEC) filings show that the group generates most of its revenue by creating advertising campaigns, including holographic augmented reality (AR) services, for its clients. It mainly offers 3D models that are embedded into a client’s advertising movie. Although the sector is still in its early days, during the decade, AR market in China is expected to grow in double digits.
The most recent SEC filing says “Approximately 69.3%, 80.5%, and 83.8% of our revenues were generated by our holographic AR advertising services for the years ended December 31, 2017, 2018, and 2019, respectively. Approximately 30.7%, 19.5%, and 16.2% of our revenues were generated by our holographic AR entertainment products for the years ended December 31, 2017, 2018, and 2019, respectively.”
In 2017, it had 97 clients for its advertising services. A year later, the number had increased to 121. Although the percentage YoY increase is notable, it is still a small number. Therefore, it’s important to see how the trend develops in future years.
WiMi announced it earned over $45.8 million in 2019, up 42% YoY. Net income hit $14.6 million, or 13 cents per share, up 15% from the preceding year. Its holographic AR advertising services generated over 9.7 billion views in 2019, up from 6.6 billion views in 2018, representing an increase of 47% YoY. Especially the increase in number of views is quite impressive. Shareholders would like to see a continuation of this trend.
What Could Derail WiMi Hologram Cloud Stock
The company’s current and future revenue highly depends on client advertising budgets. For example, it is likely that WiMi’s customers have been negatively impacted by the COVID-19 pandemic. As a result, their budgets for online advertising and marketing in 2020 may have been reduced.
Management further highlights “Our monetization model is evolving. We currently generate a substantial majority of our revenues from holographic AR advertising services and payment middleware licensing… If we fail to successfully compete with other advertising platforms, media companies, AR or traditional advertisement producers, our revenues and profits may be adversely affected.”
According to Microsoft (NASDAQ:MSFT), “middleware is software that lies between an operating system and the applications running on it… Using middleware allows users to perform such requests as submitting forms on a web browser, or allowing the web server to return dynamic web pages based on a user’s profile.”
Any adverse change in China’s economic condition in the near future could have a material adverse effect on its business or financial condition. Finally, the group’s SEC filing shows it needs a significant amount of capital for research and development investments.
In late April, WiMi started trading at an opening price of $5.30. On June 5, it hit an all-time low of $3.30. If there is weakness in broader stock markets or in China-based shares, the stock could easily go back to the $3-level soo. It is a volatile stock that makes wide daily swings . Therefore investors should proceed with caution.
The Bottom Line
WiMi Hologram Cloud is a young advertising company. It’s currently riding the wave of investor optimism on hologram technology. I believe it’d be prudent to see at least the next quarterly earnings before committing fresh capital into the shares. Management has not yet given an update on the date of release for the earnings.
U.S.-based, publicly traded companies are required to file their quarterly 10-Q within 45 days of the end of their quarters. As WiMi Hologram Cloud stock is traded through American Depositary Receipts, the filing requirement does not apply to WiMi.
Currently we’re facing global nervousness over the potential economic effects of a second outbreak of the pandemic coronavirus. So I would not invest yet invest in WiMi Hologram Cloud stock — at least not before analyzing the company’s next results.
On the other hand, if the company can increase its client base and revenue, WiMi could potentially find itself a takeover candidate. Such a development could bring impressive returns for early shareholders.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, including a Ph.D. degree, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan did not hold a position in any of the aforementioned securities.