Having never written about SOS Limited (NYSE:SOS)before, I expected to see a strong correlation between crypto prices and SOS stock.
Instead, despite the surge in cryptocurrency prices that ended in the middle of May, SOS stock is on a steady decline.
Several of my InvestorPlace colleagues have noted the company’s lack of transparency as a key reason for this decline.
However, I think SOS is operating in a business that’s currently too hot to touch. And that’s why I find SOS stock to be too richly valued at this point.
Revenue Gains Are Real
As I mentioned above, one concern that investors are expressing about SOS Limited is the lack of transparency about its financials. The company however did issue a report and the results were impressive.
However, investing is frequently about what have you done for me lately, and that’s I recommend this recent InvestorPlace article by Matt McCall.
One of his most salient points involved projections by the company that just don’t instill confidence. According to McCall, too much of the company’s potential is already priced in. Worse, the priced-in revenue growth hinges both on high Bitcoin prices and SOS getting its mining rigs online in a timely manner.
Crypto Mining Is a Drain on Resources
One reason that’s been stated for the recent selloff in cryptocurrencies, notably Bitcoin, is the environmental impact of crypto mining. Of course, this has been a story that’s been around for some time. I’m not buying into that as a bearish reason to steer clear of crytpo miners by itself.
However, it’s becoming impossible to ignore the number of computer chips that crypto miners require. Bitcoin mining’s appetite is contributing to the global chip shortage that is costing automakers and telecom companies billions of dollars.
The shortage has led to action by China’s Inner Mongolia to ban new cryptocurrency mining projects and a move to shut down existing projects. It’s important to note that Inner Mongolia accounts for 8% of all global bitcoin mining.
That’s more than the entire United States (7.2%). Keep in mind that cryptocurrencies are already under scrutiny for a variety of reasons having to do with the lack of regulation that contributes to their popularity.
But let’s bring this closer to home. As David Moadel recently wrote, SOS Limited reported completion of the first phase of its Leibodong Mine.
When the company installs all those mining rigs, it says it will gain up to 400 gigahertz of Ethereum (CCC:ETH) hash power.
This is significant because Ethereum is mined using proof of stake technology. This would give SOS a competitive advantage since proof-of-stake mining can only be done by miners that already own a significant amount of the cryptocurrency.
Of course, “Phase One” implies that there are other phases to come. If crypto mining remains under scrutiny, I’ll refer you again to McCall’s comments. This means the company’s rosy revenue projections must be taken with a grain of salt.
SOS Stock Is Not a Buy at This Price
Cryptocurrencies continue to be volatile and if they continue to go down, that will weigh on SOS stock. Crypto mining stocks face other headwinds that are likely to contribute to that volatility.
This means that a lot of things must go right for SOS Limited, but even if they do it’s likely that SOS stock has further to fall, particularly with cryptocurrencies in a down cycle.
If you desire to open a speculative position, the technical setup looks challenging. There might be a level of support at $2.96. But if the stock loses that level, then SOS stock will be a falling knife that’s best to be avoided.
On the date of publication, Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for Investor Place since 2019.