Editor’s Note: This article was updated on April 20 to correct FansUnite’s revenue and add more information about its its future plans.
Most over-the-counter (OTC) stocks are speculative and pose a “high degree of risk,” warns OTC Markets, the owner of the OTCQX and OTCQB networks. Indeed, many names have become OTC stocks — which are traded through multiple broker-dealers, rather than just one exchange — after being ejected from a stock exchange because their share prices fell below $1. And in most cases, when a company’s share price drops below $1, that indicates investors think its overall outlook is quite weak.
Other firm’ shares are traded through the OTC system because they “do not meet listing requirement” of exchanges, many of which relate to firms’ size. In other words, many of the companies whose shares are traded over-the-counter are quite small and have tiny market shares and little cash, making many of them vulnerable to bankruptcy.
When OTC names generate little revenue, are in extremely competitive and vulnerable sectors, and appear to have no strong advantages over their peers, I believe that these firms are likely to weaken further and may very well go bankrupt.
Three OTC stocks that appear to be in this category are:
- FansUnite Entertainment (OTCMKTS:FUNFF)
- American Cannabis Company (OTCMKTS:AMMJ)
- Hut 8 Mining Corp. (OTCMKTS:HUTMF)
OTC Stocks: FansUnite Entertainment (FUNFF)
As I’ve mentioned in previous columns, I expect the sports gambling market to be lucrative, but extremely competitive. In my opinion, online gambling will end up looking similar to online video streaming, which is also a huge, business-to-consumer entertainment, internet-based market. And in streaming, the largest operators with the biggest marketing budgets are getting the vast majority of the revenue.
Therefore, FansUnite, a small company which is looking to sell technology to “independent” online sports gambling websites and offer sports gambling to British consumers, is poorly positioned. Most independent, i.e. small, online sports gambling websites probably won’t survive, and FansUnite will likely be vanquished by much larger players in the U.K. sports betting market.
Adding to my skepticism, in the first nine months of 2020, FansUnite had only 802,000 CAD of revenue.
But all is not hopeless. The company’s CEO, Scott Burton, told InvestorPlace that the U.K. market is not the company’s “main focus.” He says that there are “niche … opportunities … in highly competitive markets” and points out that FansUnite’s Scotland-focused McBookie unit, which it acquired in 2020, has been “profitable” for more than a decade and had 982,000 CAD of revenue in Q1 of 2021. FansUnite’s revenue in the first nine months of 2020 included six months of McBookie’s sales.
Additionally, FansUnite has licenses in Malta, “a brand” in Latin America, “a games division,” and will soon be providing software to a Colorado-based esportsbook, Burton said. The CEO reported that FansUnite has about 15 million CAD of cash, no debt, and “good cash flow” from its U.K. sportsbook.
American Cannabis Company (AMMJ)
The cannabis sector is also likely to be highly competitive, as it has fairly low barriers to entry. After all, to paraphrase the old expression , growing and selling marijuana isn’t exactly rocket science, and independent individuals have been successfully carrying out both activities for eons.
Further, I think conservative Democrats in Congress could well prevent the legalization of the drug by America’s federal government.
American Cannabis “offers consulting services for companies associated with the cannabis and hemp industries,” including “cannabis and hemp business planning, cannabis and hemp business license applications, cultivation build-out oversight services, cannabis regulatory compliance.” The company also sells many products that help businesses produce cannabis.
Again, I don’t think the cannabis business is that complicated. As a result, I don’t believe that most companies in the business will require extensive consulting services. Further, American Cannabis’ top line came in at just $1.57 million last year, down from $2.13 million in 2019, even though it was founded back in 2013.
American Cannabis recently agreed to acquire Colorado-based medical marijuana retailer NaturaLeaf, but this small firm is unlikely to move the needle much for American Cannabis, whose market capitalization is now $16.1 million.
Hut 8 Mining Corp (HUTMF)
Hut 8 is a cryptocurrency mining company. As I explained in a recent column on Dogecoin (CCC:USD-DOGE), I believe that the opposition of banks and governments to “cryptos” is likely to eventually hurt them. Therefore, I’m bearish on the outlook of most cryptocurrency companies.
Hut 8’s 2020 top line was meaningfully higher than the other two OTC stocks on this list, coming in at $40.7 million. But that was about 50% lower than the company’s 2019 revenue of $82 million. And alarmingly, last year, Hut 8’s gross profit was negative, strongly indicating that it will have difficulty becoming profitable if the new-found momentum of cryptocurrencies fades, which I think is quite likely.
With a market capitalization of around $800 million and a trailing price-sales ratio of 20, the shares have a long way to fall if things turn south for the sector and the company.
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On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.