Ideanomics (NASDAQ:IDEX) bills itself as “a global company focused on driving the adoption of commercial electric vehicles and associated energy consumption.” However, for some reason, Ideanomics now owns a real estate company and recently invested in a social media platform, Hoo.be. Don’t expect IDEX stock to rally on this kind of news.
In fact, since my last article where I delved into the hodge-podge nature of the company, the stock has fallen 18%. More specifically, it dropped from $3.06 on Apr. 8 to an open of $2.51 on May 12. In my article, I put forward the notion that that sum-of-the-parts (SOTP) did not equal the market value of the company. To me, this still stands.
So, what should you do with IDEX stock now?
Where IDEX Stock Is Likely to Go
Like I said, I still feel that IDEX stock is a bad idea all around. The company has not yet released its first-quarter financials, so we do not know exactly how much cash it has on the balance sheet. My best guess is that it has about $330 million, as I discussed in my last piece. The quarterly burn with its existing holdings is not clear yet either, but that will be evident after the Q1 earnings.
That said, if IDEX’s $41.5 million in negative cash flow from operations (CFFO) continues at this rate, expect to see the cash balance cut in half. Granted, the company’s Timios real estate business could ameliorate this. But so far, there is not enough information to determine how much the cash burn will fall.
So, let’s just assume that Ideanomics is able cut the $160 million annual burn in half to $80 million. That still means that the company has less than 3 years before it runs out of cash. This is because, once it becomes clear that Ideanomics will need to do another cash raise in about a year or so, IDEX stock will be worth much lower.
Therefore, I expect that the stock will depreciate another 35% to 40% over the next year, especially as investors forecast another equity cash raise. This puts my target price at around $1 lower, at $1.57 or so.
Where This Leaves IDEX Stock Investors
Today, there is just one analyst covering IDEX stock on Tipranks. This analyst is a bull, given their $7 price target. However, Seeking Alpha points out that the analyst projects net income losses in both 2021 and 2022.
Moreover, IDEX stock now has become “guilty by association” with a number of other speculative stocks. For example, Barron’s came out with a list of “lottery stocks” at the end of March, in the midst of the Gamestop (NYSE:GME) craze. IDEX stock was ranked number five on that list of stock-market gambles
That is not a ringing endorsement of underlying value for Ideanomics. Because of that, the company may need to do more work on educating investors on how to value the company, as well as on how its plan to acquire more companies will fit it into this SOTP picture.
I have seen this picture play out before. Perhaps the best way to look at this stock is as a speculative play. My best method to handle this kind of situation is to put together a probability matrix. So, let’s say there are three probability scenarios from here.
First, assume that there is a good chance the company can impress investors, produce cash flow and get profitable. That would raise its value by say 30%. I would allow just a 40% chance that this happens.
Next, let’s assume the worst. If my prediction comes to pass, there will be a 50% drop in the stock. I would give this a 40% chance of happening as well.
That leaves a 20% chance that the stock rises nominally, or just 10%. Now, we can put together the expected return (ER) formula.
This means that we add up all the three scenarios’ expected returns. The ER for scenario one is 30% x 40%, or +12%. The ER for the second scenario is 40% x -50%, or -20%. Finally, scenario three is 20% x 10%, or just +2%.
Bottom Line on IDEX Stock
Adding up all three ERs here equates to this: +12% -20% +2% = -6.0%. That means my best guess is that the stock will fall at least 6% over the next six to nine months, until the company reports its upcoming earnings. This makes for an expected return of $2.36 per share.
In other words, there is no bargain element here. As such, most value investors should stay away from IDEX stock until there is more information to judge the company’s prospects on.
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On the date of publication, Mark Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article.