Whenever I read about a company making a radical shift to its business plan, there are many questions on my mind. It is because of economies of scale for its new and old business? Has it found a new, more profitable niche? Does the company have valuable information that shows the risks will pay off? The goal of any public company is to create value for its shareholders, so it’s important to question how any change relates to that goal. Sphere 3D (NASDAQ:ANY) is a recent example of a company making a major shift in its business model. Year to date, ANY stock is up well over 300%.
Sphere 3D is a cloud-based software provider offering services to a variety of industries; it offers a wide array of services, allowing companies to have an integrated suite of products. ANY stock has been very volatile in 2021.
ANY Stock and the Penny Threshold
ANY stock started 2021 as a penny stock, though it had passed the threshold generally associated with that term. Penny stocks are shares of small companies that in general trade for less than $5 per share. ANY stock has a 52-week range of $1.23 – $11.98, but at around $6, it’s close to that border.
In general penny stocks are very high-risk investments due to a mix of characteristics. They are low in price, have very small trading volume, and have small market capitalizations, often less than $500 million — Sphere 3D has a market cap of $383 million. I do not classify all penny stocks as too risky, as some small companies still have a good balance sheet, strong fundamentals and an attractive valuation. Based on my analysis, though, ANY stock isn’t one of them.
A Mining Transformation
Bitcoin (CCC:BTC-USD) and the crypto market are not suitable for all investors. It comes with high risk and volatility. The price of cryptocurrencies is heavily affected by news and sentiment. Even the decision by the Federal Reserve about the timing of tapering may drive cryptocurrencies into a lot of volatility.
Back in June, it was announced that Sphere 3D was merging with a Bitcoin mining company, Gryphon Digital Mining. Gryphon claims to be the largest Bitcoin miner with zero carbon footprint.
When a material and pending merge is announced I always want to read more on the related companies’ official websites. It adds credibility and is in my opinion the least they can do to inform the public. I was not able to find any such information on Sphere 3D’s investor relation website. The fact that the latest press release on the company’s website is dated back to 2019 is not a positive sign to me.
The announcement offers a bit of information on how the two companies’ business will align: “Sphere 3D Corp specializes in containerization, virtualization and data management solutions. The merged company will focus on expanding Gryphon’s digital mining operations and utilize Sphere 3D’s proprietary enterprise solutions.”
Of course, the merger is not yet final and will need to be approved in Q3 2021 by the stakeholders of both companies. That leaves some uncertainty up in the air.
It is unclear why Sphere 3D is now focusing on Bitcoin; it doesn’t relate to any of the company’s current core competencies. My best guess is that they are simply very optimistic about the future price of the leading cryptocurrency, but that isn’t a guarantee of future success.
The Worrying Financials of ANY Stock
The fundamentals of ANY stock are, in a word, chaos. Starting with sales growth, it is negative and has declined for the past four consecutive years. In 2017, revenue reported was $81.5 million, and in 2020, it was only $4.85 million. Sphere 3D is unprofitable, has a negative EBITDA and is burning cash with consistently negative free cash flow.
I am worried about the level of its cash reported on its balance sheet. In 2020, the company only had $461,000. For 2020, Sphere 3D reported short-term debt of $1.83 million and long-term debt of $672,000. Its cash-to-debt ratio of about 18% is too low.
Recently, the company announced plans to raise funds by selling shares to institutional investors. This was not positive for the stock price. The immediate exercise price of $9.50 per share for the warrants caused a selloff for ANY stock.
Ironically one day before the announcement on Sep. 2 ANY stock had a high price of $11.98, making that a tempting offer for the institutional investors and bad for retail investors.
The latest Q2 2021 financial results showed consistent weakness to revenue growth, slightly increased operating expenses, a contraction to gross margin and a net loss.
The company reported a net loss of $3 million, or 19 cents per share, compared to a net loss of $1.9 million and 41 cents per share in the year prior quarter. Revenue for both quarters stood at just shy of a million dollars.
Overall my opinion on ANY stock is to avoid it now. Sphere 3D is struggling financially, and the circumstances surrounding the shift to cryptocurrency are unclear.
On the date of publication, Stavros Georgiadis, CFA 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.
Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.