When I discovered that I’d been assigned to cover Wimi Hologram Cloud (NASDAQ:WIMI), I thought it had to be some prank by one of my editors. Let’s let the technophobe cover Wimi Hologram Cloud stock. That ought to be good for a laugh or two.
Seriously, I had never heard about this Chinese company that specializes in holographic products and services utilizing augmented reality (AR). A quick flip through its 20-F annual report and its initial public offering prospectus from late March, and I think I’ve got the lay of the land.
Whoever came up with the name ought to be fired because it’s a mouthful. Beyond that, the applications for its advertising and entertainment customers seem authentic and its sales, growable.
That said, I think it’s easy to see by the volatility in July, that not everyone is convinced WIMI is the real deal. Like Luckin Coffee (OTCMKTS:LKNCY), WIMI could end up imploding on itself.
Until then, here’s why my first impressions are to recommend its stock for speculative investors. For the rest of you, I’ll need a little more time to consider its business viability over the long haul.
Why I Like WiMi Hologram Cloud Stock
Investing in Chinese stocks takes guts. It’s hard enough making money off U.S. companies. But betting on businesses operating halfway around the world, where it’s virtually impossible to verify any of what’s written in its Securities and Exchange Commission (SEC) filings, makes a bet on the holographic AR company a shot in the dark.
The company’s IPO prospectus lists a total of six underwriters. Some of them, such as Benchmark Company and Maxim Group, I’m familiar with. So, it’s not as if a bucket shop took the company public.
According to Frost & Sullivan, a 60-year-old consultancy and research firm that specializes in growth companies, it believes that WiMi is “the largest holographic AR platform in China, in terms of total revenues in 2018.”
It’s always good to be the biggest or the best. However, as I said earlier, I have no real way of determining if this is true, other than finding a second opinion from someone other than Frost & Sullivan.
But for now, let’s assume this is 100% accurate.
WiMi was able to sell 4.75 million American Depositary Shares (ADS) at $5.50 per ADS in its March 31 IPO. It then filed on July 27 to sell an additional 7.56 million ADS’ at $8.18 a share. One of the buyers of its stock is said to be an affiliate of Weibo (NASDAQ:WB), the owner of WeChat, China’s largest social media platform.
Less than two weeks earlier, WiMi stock was trading above $24. And then the hype over its business became too much for investors, and its stock crashed back to earth, losing about two-thirds of its value by the time it filed for a follow-on offering.
Timing Is Everything
For me, two things stand out about the company.
First, companies like Weibo wouldn’t be buying the follow-on offering if they felt WiMi’s business was a hollow shell. Secondly, the company is already profitable, meaning any growth in the future should come with correspondingly higher profits.
As I write this, WiMi has a market cap of $561 million. That’s 12 times its 2019 sales of $45.8 million and 38 times its 2019 earnings of $14.9 million. That seems like a nosebleed valuation. However, in just two years, it has grown its sales and earnings by 66% and 42%, respectively.
That’s not bad when you consider that the holographic AR market remains underpenetrated in both China and the world.
Some of my InvestorPlace colleagues have advised readers to exercise caution when considering an investment in the company.
“WiMi Hologram Cloud is a young advertising company. It’s currently riding the wave of investor optimism on hologram technology,” wrote Tezcan Gecgil on March 30.
“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.”
The downside, Gecgil maintains, is that a second wave of the novel coronavirus could put a severe crimp in the company’s advertising revenue. News on this front or a bad quarterly report would undoubtedly send its stock lower, perhaps below its original IPO price of $5.50.
While it’s never a bad thing to go slowly, the fact that it’s profitable ought to reassure speculative punters that the next quarterly report will be reasonably decent despite Covid-19.
If you can afford to lose your entire bet, I like how the company’s positioned itself. As we’ve seen with Luckin, there are much worse bets to make in China.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.