Several Red Flags Make SOS Limited Too Risky to Own

Meme stocks have dominated in 2021, and SOS Limited (NYSE:SOS) has benefited from the trend of irrational exuberance in investments. If you’re considering taking a position in SOS stock, there are a few things you should know first.

From its unfocused business model to its shaky fundamentals, SOS Limited is flying several red flags that investors should be aware of. Additionally, a Hindenburg Research report made several concerning allegations about the company’s activities.

Overall, SOS stock is too risky to be worth a buy at this time. Let’s take a closer look at the factors that can impact the stock’s future performance.

The Core Business Model Is Unclear

On its website, SOS Limited describes itself as “a high-tech company with AI blockchain as the core technology, headquartered in Qingdao. The company provides customers with rescue, big data, trade, digital asset management, and other information technology services through AI block technology [and] satellite communication.”

Furthermore, it provides several other services through communication services ranging from satellites to telephones, including:

• Emergency medical and living services
• Emergency medical, road and safety rescue
• Health advice
• Financial bailouts

And finally, the company has a crypto mining business that made headlines and moved SOS stock to a 52-week high of $15.88 in February 2021. However, soon afterward the shares witnessed a dramatic selloff of 83% to its current price around $2.75.

The company’s main focus is unclear. Is it a Bitcoin (CCC:BTC-USD) and Ethereum (CCC:ETH-USD) mining company? Or it is operating in the insurance market business? These two unrelated services pose several challenges for SOS Limited in terms of profitability, future business plans and prospects.

The company also announced it was starting businesses connected to blockchain security, insurance and banking. How will this work out in the future? I do not know, but I do not consider this mix of business activities a positive. On the contrary, it increases the riskiness of the company overall.

Hindenburg Research and Lawsuits

In February, Hindenburg Research tweeted several allegations about SOS Limited.

“We are short $SOS, which we believe to be an obvious China-based shell game reanimating the corpse of a former China based company that earlier imploded 90% from its highs. We think SOS is a $0 and has significant regulatory risk,” the tweet stated.

Interestingly enough, Hindenburg Research also tweeted, “We visited the address listed in the company’s SEC filings and found it was a hotel.”

These are very serious accusations that imply the company is a shell game. SOS Limited has replied to the accusations, saying that they were “distorted, misleading, and unsubstantiated claims regarding the Company.”

There was even a request by SOS Limited to sign a petition and send a message to the U.S. Securities and Exchange Commission (SEC) to investigate Hindenburg Research for alleged market manipulation efforts.

But the story gets even more interesting when you factor in the lawsuits against SOS Limited. Investors who suffered a loss when the bubble burst in February have since sued the company.

Financials, Crypto Mining and the Future of SOS Stock

The annual report for 2020 showed some positive results. For example, revenues were up 334% to $50.3 million, and net income was up nearly 200% to $4.4 million.

However, a massive stock dilution in 2020 raised the number of total shares to 352 million compared to 62.4 million shares in 2019. Another negative for SOS stock is that its cash flow from operations was negative $43.5 million in 2020.

A market valuation of nearly $500 million and a net income of only $4.4 million do not make the stock look cheap at all. I consider the sales growth of 334% to be unsustainable. And with a history of cash burn in four of the five previous fiscal years, things do not look rosy for the valuation of the stock.

However, there have been major positive developments in SOS Limited’s crypto mining business this year. First of all, the company launched 6,039 mining rigs for its crypto mining operations. Furthermore, SOS Limited entered into a joint venture with Niagara Development to accelerate its blockchain operations in the U.S.

This will require several capital expenditures that may push SOS Limited’s free cash flow even further into the red. With very volatile prices for Bitcoin and Ethereum, whether the company can profit from this venture remains to be seen.

The Verdict on SOS Stock Is Bleak

Another strike against SOS stock is the fact that the company last filed its quarterly results in late 2020. Why has there been such a long delay between its reports? I do not like this, as it is yet another red flag for the company.

But on the whole, I do not like SOS stock either. It seems too risky a stock with its severely diluted shares, overall poor fundamentals and no easy route to sustainable profits.

Last year’s stock dilution makes the stock too expensive when combined with its negative free cash flow and its five-year trend history.

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.