It’s not clear what is going on at Kaixin Auto Holdings (NASDAQ:KXIN), a retailer of used cars in China getting attention in the markets, but volatility is holding shares of KXIN stock in a tight bear hug.
The penny stock attracted the spotlight recently because of significant prices swings and some investors trade cheap stocks these days because they appear to be affordable. But potential investors should heed the warning flags (beyond the usual cautions over penny stocks) that are waving around Kaixin.
These warnings include turmoil at the top of the company, an uncertain future and, of course, stock volatility.
Sound familiar? We’re not talking about Luckin Coffee (OCTMKTS:LKNCY) but investors in the United States are justified in being wary about KXIN stock.
A Closer Look at KXIN Stock
If Kaixin Auto is not a name you recognize, don’t worry. You haven’t missed the next great thing.
That said, you might recognize how a used car chain in China reached the Nasdaq. The answer is S-P-A-C. Yes, Kaixin Auto Holding was created by a reverse merger with a special purpose acquisition company. That’s the process of choice lately for companies to go public without the work and transparency involved in the traditional initial public offering process.
Kaixin was a part of Chinese internet company Renren (NYSE:RENN). However, last year, Kaixin merged with a SPAC named CM Seven Star Acquisition Corporation.
Kaixin began in 2015 as an auto financing firm and moved into premium used car dealerships three years later. The firm specializes in selling used luxury vehicles and offering related support services at 14 dealerships.
My InvestorPlace colleague Will Ashworth recently wrote that while the company’s revenue increased from $116.6 million in 2017 to $334.7 million in 2019, Kaixin is not profitable.
The company lost $133.4 million in 2019.
“To put that in perspective, for every dollar in sales, it loses 40 cents,” Ashworth writes.
And that performance was before the novel coronavirus upended the world’s economies and put a lot of pressure on many retail operations, such as auto dealers.
A Change in Business
Given its inability to produce a profit, it’s not a huge surprise that the company announced recently it was leaving the used-car business in its corporate rear-view mirror.
In the Aug. 26 statement, Kaixin said it reviewed its business model “decided to put a halt to its used car dealership business operations.”
“As a result, Kaixin expects that its revenues in the second quarter in 2020 will be significantly lower than the revenues in the prior periods and it may not have meaningful revenues starting from the third quarter of 2020,” the statement said.
Kaixin’s statement confirmed that the Covid-19 pandemic had a “material adverse impact” on its business that brought about “a significant loss of revenues.”
In addition, the company said it “initiated legal proceedings” against shareholders of three of its dealerships. These three dealerships, the company notes, “accounted for a majority of Kaixin’s revenues in 2019.”
That noise you hear in the distance comes from those caution flags around KXIN stock.
Meanwhile, Kaixin hopes to pivot and cash in on China’s electric vehicle mania. On Nov. 3, the company agreed to merge with Haitaoche, a Chinese e-commerce company that imports automobiles. Haitaoche apparently intends to use Kaixin’s dealership network to sell electric vehicles “and serve a wider group of distributors and consumers.”
A Nov. 5 statement announcing the planned merger also said Kaixin’s CEO and chief operating officer left the company and were replaced by Haitaoche’s CEO.
The Bottom Line on KXIN Stock
Kaixin is a China-based penny stock that attracted attention recently when shares of KXIN stock briefly spiked. Shares are currently trading around $3.50 after surging to $8.15 in October and falling shortly thereafter. The stock’s 52-week high is $13.40 and its 52-week low is a miserable 40 cents.
The spotlight on Kaixin reveals turmoil and uncertainty roiling a company that is not profitable.
This is not a recipe for a good success, and investors should avoid KXIN stock.
On the date of publication, Larry Sullivan did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Larry Sullivan is a veteran journalist in Florida who has covered banking and finance for several years. He is a former investing editor at U.S. News & World Report in Washington D.C.