MicroAlgo Rockets Up--And Plunges Back Down

seekingalpha2023-12-09

MicroAlgo experienced a significant price spike on December 6, 2023, but it was short-lived and unsupported.The jump in price followed a press release that had no significant impact on revenue or ...

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MTStock Studio/E+ via Getty ImagesThesis MicroAlgo Inc.  was quite the story on December 6, 2023, but by the next afternoon, it was revealed to be a flash in the pan, and just one of several unsupported price spikes in the past year. Data by YChartsGoing up On Wednesday, December 6, 2023, the shares of MicroAlgo shot up, from $2.42 at the previous close to $10.76 before closing at $9.58. As those blank spots on the chart show, the price even gapped up twice. The next day, the bears were out in force, pushing the price back down to $2.05 at the close. At the close on Friday, shares were trading at around $2.18, slightly higher than the Thursday close. 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MTStock Studio/E+ via Getty ImagesThesis MicroAlgo Inc. (NASDAQ:MLGO) was quite the story on December 6, 2023, but by the next afternoon, it was revealed to be a flash in the pan, and just one of several unsupported price spikes in the past year. Data by YChartsGoing up On Wednesday, December 6, 2023, the shares of MicroAlgo shot up, from $2.42 at the previous close to $10.76 before closing at $9.58. As those blank spots on the chart show, the price even gapped up twice. The next day, the bears were out in force, pushing the price back down to $2.05 at the close. At the close on Friday, shares were trading at around $2.18, slightly higher than the Thursday close. Why the big jump on Wednesday? It came in the wake of a press release from MicroAlgo announcing that: “its Chinese companies, Shenzhen University Semiconductor Manufacturing Research Institute, and Haikou Comprehensive Free Trade Zone Management Committee plan to sign a cooperation agreement, namely \"postgraduate training and practice base\", marking the three parties contributing to the development of domestic innovation to make the talent ecological construction more perfect.” The release goes on, but basically, that was it. No mention of higher revenue or earnings, no announcement of a disruptive new product, or of new and exciting markets. Indeed, there wasn’t any explanation of how the deal would benefit investors, although we might see it having some indirect operational benefit in four or five years. Essentially, it was meaningless news for the market, but some investors apparently used it as a catalyst with which to drive a share price rally. Others saw the momentum and hoped to buy high and sell even higher—and probably those who got in early and got out early did. Coming down Of course, many investors, especially those who got in late and got out late, would have lined the pockets of the early birds. While we don’t know why the price plunged on Thursday, there are often basic reasons for the downs. Some investors would have wanted to take profits, whether they bought earlier or even early on Wednesday. For the nimble and sophisticated investor, this might have been an opportunity for a quick capital gain. For many, and perhaps the majority, exiting would have been a salvage operation: Get out while you can and minimize your losses. There was simply nothing in that press release that justified any kind of upward rally, and reality crept back into the pricing on Thursday. Did the bounce back go too far, did the market overcorrect? About MicroAlgo MicroAlgo is a central processing algorithms company, one that helps digital marketers optimize their advertising spending. In its 10-K for 2022, it wrote, “Eligible consumers are selected in accordance with their demographics and personal preferences, which our central processing algorithm service is able to analyze for the purpose of maximizing the internet advertisement effect.\" The marketing guru John Wanamaker is credited with saying, “Half the money I spend on advertising is wasted, and the trouble is I don’t know which half.” Many advertisers have felt the same way since Wanamaker died in 1922. In the digital age, though, it’s possible to track which ads get clicks and which don’t. And that’s what MicroAlgo does, at an advanced level, mainly in China. Further, you don’t need to read an Alphabet Inc. (GOOG) financial statement to know that online advertising revenue is huge, and growing. In addition, MicroAlgo provides algorithms for gaming and intelligent chips, two other growing industries. That’s the attraction of the stock, why an investor might buy and hold for three to five years. But, does its valuation justify buying now? Valuation When I published MicroAlgo: Be Cautious Of This Hot Stock on November 2, I was expecting to see third-quarter earnings at any time. However, it’s now early December and I’m still waiting. The latest financial information available was a Form 6-K, covering the first half of 2023. It had total operating revenue of $38.1 million, made up of product sales ($1.4 million) and services ($36.6 million). The cost of revenues was $26.4 million, leaving a gross profit of $11.63 million. However, it turned into a net loss because of other expenses, the most important of which was research and development at $13.3 million. That’s roughly a 125% increase over the first six months of 2022. This kind of additional spending suggests the firm believes it has some valuable technology coming soon While somewhat dated, the first-half information makes it possible to calculate at least one valuation metric: price-to-sales, or P/S. SeekingAlpha shows total revenue over the past four quarters as $72.8 million; the 6-K shows a June 30 share count of 43,856,706; and the closing price on June 30 was $2.31. Those data points produce a sales per share figure of $1.66 and a P/S ratio of 1.39, while SeekingAlpha calculates that number to be 1.19. Whichever the case, that’s roughly half the 2.77 [TTM] median of the information technology sector. Book value per share also suggests undervaluation, based on total stockholder equity of $464,924,250, preferred equity of $312,543, shares outstanding of 43,856,706 and a share price of $2.31 (all data for June 30). The book value per share is calculated at $10.59, just $0.17 below Wednesday’s high. It’s also much higher than the current price. The price-to-book ratio [TTM] is 1.49, again well below the sector median of 2.89, as reported by SeekingAlpha. That’s a difference of 48.28%, again suggesting the stock is worth roughly twice as much as its June 30 and current price. Based on this information, I would tentatively estimate a fair price as being between $4.50 and $5.00. I say tentatively because investors should have received third-quarter information by now, the limited number of valuation ratios, and the general lack of transparency about the company (see my article of November 2). Risks As I pointed out in that earlier article, MicroAlgo has seen several big price swings in its short history as a publicly traded stock. If you buy at any price above $5.00, it would seem prudent to take some profits or buy a put option to lock in at least some of the gain. Other concerns include its dependence on a limited number of customers; three of them accounted for 45.2% of its total revenue in 2022. Second, there are geopolitical risks because it is based in China and potentially subject to PRC government pressures and legal limitations. Transparency continues to be an issue. The company structure is something of a black box and second, it does not have a website in English. Conclusion The December 6 share price rally was a mouse that roared, a one-day phenomenon that likely enriched a few investors and left many others worse off. It underlines the danger of getting into a bidding war on thin news. Based on the limited data, I would estimate MicroAlgo is undervalued and may be worth as much as $5.00. But, this is still a highly speculative stock, and any investment should be made very cautiously. I maintain my Hold rating, but with less conviction than previously, because of the lack of third-quarter information.  Editor's Note: This article covers one or more microcap stocks. 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