SOS Limited (NYSE:SOS) now has an estimated market capitalization of $651 million based on its recent prospectus. This filing on April 4 indicates on page S-8 that SOS has 179.507 million ADS (American Depository Shares) outstanding. Since SOS stock closed at $3.63 on Friday, the market value of $651 million reflects its recent capital raise activity.
But I believe that SOS stock is still too high, given the company’s 20-F annual report and press release on May 5 for its full-year 2020 earnings. SOS, which is now a Bitcoin (CCC:BTC-USD) and Ethereum (CCC:ETH-USD) mining company, reported huge gains in revenue and earnings over last year. Sales were up 333.6% to $50.3 million, and net income was up 193.3% to $4.4 million.
Cash Burn At SOS
However, its cash flow from operations (CFFO) was negative $43.55 million. After capex spending of $0.5 million, its free cash flow (FCF) was negative $44.5 million for the year.
The thing is, given that the company now has about $125 million (my best guess based on its recent capital raise), the burn rate will eat through that capital fairly quickly. That is unless the company can turn cash-flow positive.
And the problem is we don’t know whether the company’s crypto mining operations will turn cash-flow positive any time soon. So far, the company has not yet reported its Q1 earnings. In addition, the company operates an insurance market business. Most of the revenue it made last year was from the insurance marketing division, not the crypto mining area. But the latter is causing most of the cash burn.
These are two polar opposite types of businesses. One is marketing oriented and the other is hardware and electricity-centric. So it is hard to estimate what the company will do next year. So far analysts have not come out with reports on the stock, according to Seeking Alpha and Yahoo! Finance.
Lack of Guidance
Management has provided little guidance and there is almost no information on which to judge the future. In situations like this, the best course sometimes is just to wait.
On top of everything else, the company is based in China and there is very little transparency there between management and its shareholders. Often these kinds of companies don’t feel the pressure to keep its shareholders up to date. They tend to focus on business and not on the stock price.
As a result, the SOS stock price can suffer. For example, let’s assume that it runs another year of $40 million to $50 million in FCF losses. That will reduce its cash balance to below $80 million. After that, the company could be seen as needing to raise more capital if the cash burn continues at this pace.
That will put pressure on the stock.
What To Do With SOS Stock
Here is another way to view the stock’s valuation. At a market value of $651 million, its price-to-sales ratio today is 12.9 times. Compare that to Marathon Digital Holdings (NASDAQ:MARA), another crypto miner. Its price-to-sales ratio is 11.4 times 2021 estimates sales.
But most of SOS’s revenue was from insurance marketing, not crypto sales. So the two are not comparable. Therefore, it is not appropriate for SOS stock to have an equivalent market valuation. It should be at least one-third to one-half of this valuation, depending on the outlook this year for its crypto mining sales.
Therefore, look for SOS stock to fall at least a 33% to $2.42 per share from its price today (June 4) of $3.63. This coincides with my estimate last month on SOS that it is worth no more than $2.40 per share. Given this outlook, most defensive investors will wait for more information before they invest in SOS stock.
On the date of publication, Mark R. Hake held a long position in Bitcoin, Ethereum, Marathon Digital Holdings, but no other security mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.