Digitization has advanced very quickly as part of a broad  technology revolution. One of the biggest strands of this revolution that has emerged in recent years is Augmented Reality (AR). AR is an enhanced version of the real world that is achieved through the use of digital visual elements, sound, or other sensory stimuli delivered via technology, according to Investopedia. Its use is a growing trend among companies involved in mobile computing and business applications.

Headquartered in the People’s Republic of China, Blue Hat Interactive Entertainment Technology (BHAT) is a producer, developer and operator of AR interactive entertainment games and toys, including interactive educational materials, mobile games, and toys with mobile game features. BHAT’s interactive entertainment platform delivers a rich visual and interactive environment for users through the integration of real and virtual scenery.

Despite the unprecedented popularity garnered by video games amid the COVID-19 pandemic, BHAT has generated very poor sales of  its interactive game series over the past year. However, the company’s thriving smart education business line was a significant addition to its portfolio during the year. The “AR Immersive Classes” (ARIC), which is integrated with physical exercises, gained major traction in local Chinese preschool education systems, which adapted the product to combine teaching with entertainment.

In line with the technology rally, the stock has surged 110% over the past year. However, the business is still struggling to stay afloat due to its bleak prospects and macro uncertainties.

Click here to check out our Video Game Industry Report for 2021

Here are the factors that we think could influence BHAT’s performance:

Expanding Educational Application

Last May, BHAT  launched and expanded its Smart Immersive Education Classes, or ARIC, by signing a three-year partnership with smart education service provider Sutesen Information Technology. Its goal is to deliver  ARIC in up to 1,000 preschools in China over the next three years. For each preschool that licenses the ARIC system, BHAT will receive a monthly subscription fee of $570 – $620, which should culminate with  $6.8 – $7.4 million in recurring revenue for the company.

In February, BHAT signed a three-year agreement with Zhong Ya (Shenzhen) International Education Investment Co. in which  BHAT will provide its ARIC to Zhong Ya’s 680 kindergartens. Back in November, BHAT signed an agreement with three preschools of Guangzhou Development District Talent Work Group of ARIC, marking the beginning of BHAT’s strategic expansion in the Greater Bay Area.

Robust Financials

BHAT anticipates releasing financial results for the fourth quarter and full year ended December 31, 2020 later this month. According to its preliminary fourth quarter results, BHAT’s total revenues increased 70% year-over-year to $20 million, driven primarily  by the company’s new Internet Data Center (IDC) business, which saw significant growth in the second half of 2020 following its  strategic acquisition of Xunpusen Technology. According to company management, “The acquisition has set a strong foundation for us to be able to execute an effective sales and marketing strategy for our AR, education, and mobile game products by leveraging their expertise in enterprise software solutions and mobile sales to promote products directly to customers.”

Growth in Core Operations

Last  December, BHAT entered into an agreement to acquire 51% of Fuzhou Csfctech Co., a China-based developer and distributor of mobile games, and its two subsidiaries, in a $7.78 million deal. The acquisition marked an important step in the development of BHAT’s mobile games unit. Later that month, BHAT divulged that  that Csfctech has been actively exploring overseas markets. Csfctech has a robust gaming pipeline for 2021, and the company is currently testing five new gaming products for overseas launch and distribution this year.

Strong Institutional Backing

On February 4, 2021, BHAT closed a direct offering with two institutional investors, for the sale of 7.16 million ordinary shares at a price of $1.06 per share, with proceeds totaling  proceeds of $7.5896 million. In a concurrent private placement, the company also issued unregistered warrants to purchase up to 3.58 million ordinary shares. Following this, insiders and institutions now hold more than 67% of BHAT’s total shares outstanding.

Struggling to Stay Afloat

Last November , BHAT received  notification from Nasdaq  that it is was not in compliance with the exchange’s minimum bid price requirement since the closing bid price for BHAT’s common shares listed was below $1.00 for 30 consecutive trading days. The notifications informed  BHAT that if it  failed to regain compliance within 180 days from the date of notification the company would  face delisting. BHAT regained compliance with the Nasdaq’s minimum bid price requirement  on January 27.

POWR Ratings Indicate Ambiguous Prospects 

BHAT has an overall C rating, which equates to Neutral in our POWR Ratings system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

Our proprietary rating system also assesses stocks based on various  categories. Among these  categories, BHAT has a B grade  for Sentiment, reflecting favorable analyst expectations. BHAT is also rated a B for  Momentum, in line with its market beating returns over the past year.

However, BHAT has a grade of D for Stability, indicating that the stock is much more volatile than its  peers. The stock has a D grade for Quality also. Of the 25 stocks in the C-rated Entertainment – Toys & Video Games, the stock is ranked #16.

Beyond what I stated above, we also have given BHAT grades for Growth and Value. Get all the BHAT ratings here.

Bottom Line

BHAT’s management anticipates the company’s operating margins will  improve over time as it  continues to implement inorganic growth strategies and sign new agreements for its AR and mobile game offerings and increases sales of its retail products and interactive education initiatives. However, BHAT has been struggling and is on a downward trajectory since its IPO in July 2019. The company has faced delisting threats, both on a political and compliance basis, despite the stellar gains in the past year. Hence, we believe that it is too soon to bet on BHAT. Investors should wait for a better entry point as the company’s fundamentals improve going forward.

Click here to check out our Software Industry Report for 2021

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BHAT shares were trading at $1.48 per share on Friday morning, up $0.01 (+0.68%). Year-to-date, BHAT has gained 66.29%, versus a 4.26% rise in the benchmark S&P 500 index during the same period.

About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...

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