Following its recent one-for-six reverse split, Taoping (NASDAQ:TAOP) stock has been drawing a lot of attention. Year-to-date, TAOP stock is down about 18% and the price hovers at $2.77.
The Shenzhen, China-based company provides cloud solutions and display technologies. The post-coronavirus market is seeing increased trading interest in a broad range of stocks. Those operating in an emerging technology area and have a low share price are usually the favorites among retail investors.
However, I do not believe Taoping stock should belong in a long-term portfolio. Here’s why.
Taoping Stock Doesn’t Seem to Have a Future
Taoping offers smart display terminals and digital advertising solutions so that customers can distribute ads on cloud-based ad display screens.
The company, formerly known as China Information Technology, started operations in 2004. It listed on NASDAQ in 2008. The early years saw genuine interest in its operations. For example, it was among the “Deloitte Top 500 High-tech & Fast-growth in Asia Pacific in 2009″ and “Forbes Most Promising SMEs in China list in 2011.”
Nonetheless, the past 15 plus years have not translated into much fiscal strength. For the year ended Dec. 31, total revenue was below $14 million. That number meant a net loss of over $3.5 million, or 9 cents per share.
The company’s most recent Form 20-F filing with the Securities and Exchange Commission (SEC) is concerning. Management first highlights risks related to the Covid-19 pandemic as well as its limited operating history of selling cloud-based products and services.
It further states,
“We have a limited operating history of selling cloud-based products and services and may be unable to achieve or sustain profitability or reasonably predict our future results … If we are unable to secure additional financing or identify suitable merger or acquisition targets, we may be unable to implement our long-term business plan, develop or enhance our products and services.
As a result, the company concludes it may be unable to achieve or sustain profitability or reasonably predict the future. In fact, its auditors have expressed substantial doubt about our ability to continue as a going concern.”
I believe the group has laid out a substantial case for not investing in Taoping stock.
Recent Reverse Split Is A Warning
Furthermore, earlier in July, management announced a 1-for-6 reverse stock split that took effect at the market opening on July 30, 2020. A reverse stock split is a conventional stock split in reverse; instead of a company amending its charter to have more shares authorized and outstanding, the charter is amended to dramatically reduce the number outstanding shares.
Many penny stocks do a reverse stock split at some point in their trading history. First of all, they do not want to be delisted from the stock exchange. They also do not want their stock price to look very cheap, especially in the eyes of potential institutional investors. Without a reverse merge, a delisting would have been a probability for Taoping stock in the near future.
But reverse splits are rarely successful, according research by led by Karyn L. Neuhauser at Lamar University. She wrote:
“Using a sample of 1,206 reverse split stocks during the 1995–2011 period, we find only 500 reverse splitting firms are able to survive on their own for five or more years. Of the 706 firms that are unable to survive independently, about 20% are acquired by another organization while 80% get delisted for other reasons, usually due to an inability to meet listing requirements or bankruptcy.”
These numbers are another warning for potential long-term investors in TAOP shares. The company may not even be able to exist in its current form in the near future.
Bottom Line on TAOP Stock
Until this year, not many investors would have necessarily paid regular attention to Taoping stock. However, the recent increased level of retail trading seems to have changed that.
Yet, Taoping stock remains a news-driven speculative investment. It may not be able to create much shareholder value in the near future. Let the buyer beware.
On the date of publication, Tezcan Gecgil did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
The author 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, 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. She also publishes educational articles on long-term investing.
