Meme stocks continue to amaze the investing community in 2021. Remark Holdings, Inc. (NASDAQ:MARK) stock is a popular penny stock in the Reddit community. That community has been betting on questionable stocks with very poor fundamentals and moves based on the social trading power of herd investing, fear of missing out (FOMO), and fear, uncertainty and doubt (FUD) trading.
However, rational investors do not fall prey to this stock prices manipulation game. Irrational ones participate in a game where time is ticking for the ones who will become the “greater fool” — buying shares as they move higher before they collapse.
Strangely, the investing community has pushed MARK stock to have a 52-Week range of 75 cents – $6.7000. It is painful for the investors buying near the 52-week high to witness their shares trade at $1.47 as of today.
Remark Holdings shares have lost about 20% since the beginning of the year versus the S&P 500’s gain of about 25%. Before deciding to consider buying this penny stock, I argue that there are three key red flags you should be aware of.
Business Model: Betting on the Future of AI
Remark Holdings, Inc., is a technology company developing and deploying artificial intelligence (AI) products and AI-based solutions for businesses in several industries. The company sells its AI-based products and services under the Remark AI brand in the United States, and under the KanKan brand in China.
This AI stock witnesses swings wildly in its price, it was indicative that on Sep. 30, 2021 — it had a closing price of $1.05 and on Oct. 25, 2021, a closing price of $3.15. On its official website, Remark Holdings mentions that its business is all about:
“Applying the power of AI through practical and accessible solutions that solve problems, reduce risk and deliver positive outcomes across multiple industries.” Or else making “AI simplified.”
Below are three key factors you should be aware of, when investing in Mark stock.
Inconsistent Sales Growth and Net Losses
If you want growth in Remark Holdings, you will be disappointed. Data from MarketWatch shows that in 2017, reported sales were $70.6 million, followed by a steep decline of 85.76% to $10.05 million in 2018, another huge decline of 50.06% in 2019 to $5.02 million, and a surge of 102.09% in 2020 to $10.15 million.
This inconsistent trend in revenue growth is indicative of a risky business model — that shows the absence of a strong economic moat. For the period of 2016-2020, Remark Holdings has been losing money consistently. In 2020, its net income was reportedly -$13.69 million.
Balance Sheet Poses Concerns for Future Bankruptcy
Remark Holdings has a very weak balance sheet and financial strength.
According to Gurufocus, the Cash-To-Debt ratio of 0.02 and the Altman Z-Score of -35.94 are warning signals of financial distress. The financial performance as of 2009 confirms this high probability of bankruptcy. The technology company has never reported positive operating cash flow, free cash flow, or net income.
Negative Total Equity
The third key financial metric that is a huge red flag to worry about is that Remark Holdings has negative total equity. This deficit means that the company has more liabilities than assets. Total equity is an important metric that investors should analyze as the ideal scenario to increase gradually over time. Why gradually? Because then it means that the company can consistently create value for its shareholders.
Shareholders’ equity represents the net worth of a company. It is the amount that would be returned to shareholders in the scenario that a company’s total assets were liquidated and all of its debts repaid. Therefore, negative total equity as is the case for Remark Holdings shows very weak financial health.
What’s Next for the MARK stock?
Without a rapid switch to net profitability and a very strong earnings outlook, there are very dim prospects for MARK stock to recover in 2021. For now, I see no fundamental catalysts that can move the stock higher.
The three red flags mentioned make it a too-risky penny stock to own. It is more prudent to avoid it until a radical improvement in its financial performance occurs and stays. Could AI help improve the financials? We don’t know yet but — it would be very interesting if it occurs, and for sure would be positive news for this AI stock.
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.