SOS Limited (NYSE:SOS) is arguably one of the most interesting trading stocks on the market today. Almost every day, SOS stock makes a big move one way or the other.
On Monday, for example, shares surged 20% on strong operating results. But it quickly followed that up with a nearly 10% loss the next day.
Fundamentals are similarly mixed. On the one hand, SOS appears to be rapidly scaling up a large cryptocurrency mining business. It put out another press release just this week highlighting substantial progress on that front.
On the other hand, short sellers have claimed that SOS stock is a house of cards. Who’s right?
SOS: A Rapidly Growing Crypto Business …
According to SOS’ management, the company’s business is advancing rapidly. According to an update from earlier this week, the company is getting more mining equipment set-up quickly. SOS states that it has deployed a second group of 5,000 mining units, and has more on the way. According to CFO Steven Li:
Our output should grow in future quarters as we receive and install our third batch of mining rigs and have a full quarter of operations for our current rigs.
Furthermore, SOS stated that it successfully mined its first Bitcoin (CCC:BTC-USD) on Feb. 24 of this year. For all of Q1, it anticipates 41 Bitcoin and 909 ether tokens. Given the current prices of those cryptocurrencies, SOS would generate in the range of $4 million in revenues this quarter.
Presumably, that’d ramp up quickly next quarter as its mining gear would be online for a full three-month period rather than just a few weeks.
Or Is it a Dangerous Scheme?
Both Hindenburg Research and Culper Research fired off short seller reports against SOS stock recently. I’ll stick to covering the Hindenburg allegations, as its the more well-known firm.
Hindenburg successfully revealed the skullduggery occurring at Nikola (NASDAQ:NKLA) last year, and its recent report on Lordstown (NASDAQ:RIDE) has also caused a major impact. Thus, Hindenburg’s allegations against SOS must be considered seriously.
Hindenburg lays out a variety of allegations against the company. For one, it documents that the company’s purported headquarters was empty. The company responded and stated that it was at a different address, however this one showed few signs of life either, according to Hindenburg’s photo documentation.
Hindenburg also revealed that SOS allegedly inflated a key person’s resume. But perhaps the real shocker was that a purported takeover to acquire crypto assets appears to have actually been a related-party transaction. Hindenburg highlighted how both SOS and the purchased company’s website used the same code and cited an employee who said as much, thus suggesting it was a shell transaction.
Hindenburg wrapped all this up by stating that the company is an “obvious shell game” that is worth nothing. After a company response, Hindenburg doubled down. It pointed out that SOS refused to reveal the location of its mining rigs – unlike other listed crypto-mining companies – making it harder to validate the company’s purported assets.
SOS Stock Bottom Line
The tipping point for me personally, in this debate, is SOS’ corporate history. Just a few short years ago, SOS made its initial public offering (IPO). Back then it was called China Rapid Finance and traded under the ticker XRF. It intended to make consumer loans online, using a peer-to-peer marketplace. However, this business never reached consistent profitability, and the company’s balance sheet was eroding.
Not surprisingly, like so many other struggling firms, China Rapid Finance abruptly pivoted to cryptocurrency. It changed its corporate name, business strategy and ticker symbol. While some totally reinvented companies end up being successful, usually this sort of corporate makeover ends badly.
Throw in the credible short-seller allegations and SOS stock is a pass for me. I’m not the only one, either. Our Matt McCall, who is a crypto bull, nonetheless makes the case for avoiding SOS stock right now.
That said, if you are highly bullish on cryptocurrencies in the short run, there’s a good chance that SOS stock will work out. It’s hard to deny the operational momentum the company has on the mining front right now.
As long as the major cryptocurrencies keep hitting new all-time highs, SOS stock will have a strong tailwind. Just make sure not to overstay your welcome in SOS stock.
There are a lot of troubling factors here from a longer-term perspective.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.