Bitcoin mining company SOS Limited (NYSE:SOS) is probably still overvalued, even though the stock has fallen 33% since April 7. That was when it was at $6.09. SOS stock closed at $4.06 on May 4.
Moreover, the stock has drifted down 16% in the last month. This spike is higher in early April. So far, there appears to be continued murkiness about its finances. This can only lead to a lower price.
In my article on SOS stock on April 1, I argued that even if there was enough information to know its finances clearly, the stock was still too high. I argued that assuming the company makes $70 million in revenue the market cap at $861 million is 12 times revenue.
But the problem is no one really knows how many shares are outstanding now. In fact, the Chinese company just filed another extension so that it does not have to produce its annual report (20-F form) until at least May 15.
However, the company recently announced the results of its mining operations. It said that it had produced 42 Bitcoin (CCC: BTC-USD) and 916 Ethereum (CCC:ETH-USD). At today’s rates of $55,991 per BTC and $3,296 per ETH, revenue works outs to $2.336 million, plus $$3.094 million. That works out to just $5.4 million.
Even though the company said this was a partial quarter worth of revenue — even if it represented only one month — the quarterly run rate would be $16 million. That works out to $64 million annualized.
Where This Leaves SOS Stock
My best guess in my last article was that there were 173 million shares outstanding. That suggests that SOS stock has a market capitalization of $711 million. But again, keep in mind that we don’t know for sure how many shares are actually outstanding. It could be much higher, depending on whether any warrants have converted into shares. (I doubt that, though, since their exercise price is $5 per share, above today’s price).
As a result, the means that SOS stock still has a price-to-sale (P/S) multiple of 11 times ($711 million / $64 million). This is still probably way too high for a company that is still getting off the ground and which may not be profitable for a good while.
For example, Marathon Digital (NASDAQ:MARA), an established Bitcoin miner, based in the U.S., still trades for just 12.5 times forecast 2021 revenue. It is forecast to make $286 million this year and has a market capitalization of $2.63 billion.
The point is that if Marathon has this valuation, despite its track record, then SOS Limited shouldn’t be valued at a similar level.
For example, I suggest that given how early days it is for SOS, a 5 to 8 times P/S multiple is probably more appropriate. This would give SOS stock a market value of $320 million to $512 million.
This is 45% to 72% of its market value today. On average that is about 59% of today’s price. This means that the fair value for SOS stock is $2.40, instead of $4.06.
What To Do With SOS Limited
So far there are no analyst reports on the stock. Moreover, as I wrote about in my last article there have been a number of short reports or tweets on the stock. That undoubtedly has contributed to the drop in the stock.
The problem we have here, to be frank, is a failure to communicate. The company has not communicated where its finances stand, other than to state how many crypto coins it produced. No one knows for sure the total amount of cash in the bank and the total number of shares outstanding.
Moreover, recently the company announced it was purchasing 575 Ethereum crypto miners. However, again, the details were short. Were these ASIC miners (application-specific integrated circuits), or were they GPUs (graphic cards)? This makes a huge difference in the rate the company will be able to produce Ethereum as ASIC machines, although more expensive, are more efficient in wining awards.
And then on April 12, there was an announcement that SOS Limited intends to purchase three power plants. The agreement is only a letter of intent (LOI). No definitive agreement has been reached. Neither has there been any discussion of how much this would cost. In fact, SOS did not say how much more efficient it would make its mining operations. For example, what will this bring its power costs down to in terms of kilowatt-hours (kwh)?
This shows how murky the finances at SOS Limited are still at. The bottom line is SOS stock does not deserve to trade higher than $2.40, or 40% below its present price.
On the date of publication, Mark R. Hake held a long position in Marathon Digital (MARA), Bitcoin, and Ethereum.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
