To some investors, activist short sellers like those who targeted SOS Limited (NYSE:SOS) stock are market manipulators, or worse. I personally don’t believe that to be the case, but we can move past that debate.
Let’s instead focus on what SOS itself has said — both in response to those short sellers and in its filings with the U.S. Securities and Exchange Commission. More than anything else, that’s what matters.
Here’s the problem for SOS stock: the news on that front is not particularly good. Yes, SOS is trying to build out a cryptocurrency mining business, which raises hopes that the company can capitalize on the rise in Bitcoin (CCC:BTC-USD). That in turn raises hopes that SOS stock can mimic the success of Marathon Digital (NASDAQ:MARA) and Riot Blockchain (NASDAQ:RIOT), both of which have (so far) successfully pivoted into the mining space.
But there are so many concerns here — again, based on what SOS itself is saying and doing. What the company claims to be and what it is, at least at the moment, remain two very different things.
The Mining Business
Cryptocurrency mining obviously is not just about buying rigs and turning them on. The quality of both the hardware and the software matters. Right now, SOS seems to be well behind on at least the hardware front.
When the company first announced its purchase of mining rigs on Jan. 21, it left out a rather important detail: the rigs were used. It wasn’t until SOS responded to the bearish reports on Mar. 5 that the company admitted as much.
This not an immaterial difference. The success of Bitcoin mining is based on rigs. And the fact is that SOS’s equipment doesn’t seem like it can necessarily compete. As the company clarified in early March, the SOS rigs have a variety of specs. Only an unspecified portion include, as SOS put it, “components which are similar to those contained” in two branded rigs.
That’s a big problem. SOS itself is disclosing rather modest computing power relative to other miners. After receiving the second batch of 5,000 rigs, it said it would have hash power of 353 PH/s (petahashes per second). Marathon, which is purchasing new Bitmain miners, is at 1.4 EH/s (exahashes per second). Bitfarms (OTCMKTS:BFARF) estimates its power to be 1.2 EH/s. Riot Blockchain, too, has cleared 1 EH/s, with plans to clear 3 EH/s.
In fact, the shortage of mining equipment itself has kept difficulty growth low. As those shortages ease, the difficulty rate will rise — and SOS may well be left further behind.
The Rest of SOS
At the least, it’s hard to see how a $20 million purchase of used equipment is supposed to support a market capitalization near $600 million. Obviously, the rest of the business needs to contribute to at least some extent.
But there’s just not much there. SOS is a former peer-to-peer lending platform business (something like the LendingClub (NYSE:LC) of China) whose business imploded amid regulatory pressure.
Before the crypto effort, SOS pivoted into what it calls “data mining and analysis services.” But that’s simply a fancy term for lead generation.
A prospectus filed in early March details the new business. 75% of SOS data is simply bought from third-party sellers. 96% of its revenue comes from sales of that data to a single Chinese insurance agent that works with domestic insurance companies.
SOS’s “data mining” business is just a subcontractor in a long chain. That explains why the company expects gross margins of just 9% in 2020.
That’s really it. There is a small business operating a hotline for China Mobile (NYSE:CHL), which drove 3% of revenue in the first half of last year. (Full-year audited results haven’t yet been released.)
What about the SaaS (software-as-a-service) platform SOS claims to have? It generated 0.2% of sales. The crypto exchange it’s now talking up? It’s being built on another company’s software in a country where crypto exchanges remain banned.
There’s just not much here beyond the mining business. There certainly doesn’t yet appear to be enough to support a valuation near $600 million.
Avoid SOS Stock
Again, none of these problems are being unearthed by short sellers. They are coming from disclosures made by SOS itself.
SOS is trying to tell a broader story about becoming a blockchain and crypto leader in China. But that story is based on third-party software, resold leads, and used mining equipment.
There’s not much here yet. Maybe that will change, but until it does, it will be sellers, not just short sellers, that continue to pressure SOS stock.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.
After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.