China based online gaming company The9 Limited (NCTY) has been one of the biggest gainers of 2021, surging 2,241.5% year-to-date. This comes after the company made hefty investments in cryptocurrencies to capitalize on the crypto boom. NCTY has gained 2,635.6% over the past three months, and 641.4% over the past month.

However, given the highly speculative nature of cryptocurrency, the sustainability of NCTY’s price gains is in question. For instance, bitcoin stumbled on the first working day of the week owing to rising concerns regarding the liquidity of the asset and apparent distrust from Treasury Secretary Janet Yellen and Microsoft Corporation’s (MSFT) Bill Gates. This follows the record high hit by the most popular cryptocurrency in the weekend. Thus, NCTY is susceptible to sharp pullbacks in the near term, given its huge cryptocurrency asset base.

Here’s why NCTY soared more than 2,200% year-to-date, and what could shape its performance in 2021:

Cryptocurrency Portfolio

On January 3, 2021, NCTY signed a legally binding cooperation and investment term sheet with a group of cryptocurrencies mining investors to kick start its cryptocurrency business.

NCTY has signed several legally binding Memorandum of Understandings (MoUs) to acquire blockchain and cryptocurrency companies. On February 22, 2021, NCTY acquired 70% equity stake in a cryptocurrency cloud mining blockchain SaaS company Hangzhou SuanLi Technology Co., Ltd. for $7 million.

On February 16, 2021, the company signed a $10 million framework agreement with Filecoin mining machine vendor to purchase Filecoin blockchain mining machines for cash. In the same month, NCTY signed 6 MoUs with six unrelated Bitcoin machine owners to purchase bitcoin mining machines for stock compensation.

Thus, NCTY has invested heavily in the cryptocurrency business. However, the surging volatility of the digital currency and lack of trust from federal governments casts a shadow regarding its future. Moreover, with major countries introducing their personalized digital currencies, and reserve currency dollar rebounding gradually, the cryptocurrency rally is expected to be short-lived.

Declining Financials

NCTY’s trailing 12-month revenues of $7.87 million indicates a 92.3% decline year-over-year. The company has reported an EPS of $10.78 over the past year, down 198.2% year-over-year. Moreover, its total assets and revenues have declined at CAGRs of 32% and 77.5% over the past three years.

NCTY hasn’t generated cash from its operations over the past year, as evident from its negative trailing 12-month net operating cash flows and leveraged free cash flows. Also, its gross profit margin, ROE and ROA are all negative.

Trading at a Premium Valuation

In terms of trailing 12-month Price/Sales, NCTY is currently trading at 4291.58x, significantly higher than the industry average of 1.82x. Moreover, NCTY’s trailing 12-month EV/Sales ratio of 9502.27 is much higher than the industry average of 2.89.

POWR Ratings Reflect Bleak Outlook

NCTY has an overall rating of D, which equates to Sell in our POWR Ratings system. The POWR Ratings are calculated by taking into account 118 different factors with the weighting of each optimized to improve overall performance.

It has a grade of D for Value, and C for Growth, Stability, Sentiment, and Quality. This is justified, given the company’s sky-high valuations and surging momentum, despite declining financials.

NCTY is ranked #68 of 86 stocks in the D-rated China indsutry. In addition to the grades I’ve highlighted, you can check out additional ratings for NCTY here.

There are 17 stocks in the China group with an overall rating of A or B. Click here to see them.

Bottom Line

The cryptocurrency rally over the past year was mainly driven by the pandemic and declining dollar. However, with the initiatives of the new administration and expected fast-paced recovery of the biggest economy in the world, dollar is slowly gaining traction. Thus, NCTY’s crypto-driven momentum will likely end along with the cryptocurrency boom.

Furthermore, on November 17, 2020, the company received a formal notice from NASDAQ as its market value of securities fell below $35 million over the past month. If NCTY fails to raise its market cap by May 11, 2021, the company’s ADRs would be delisted from the exchange. In light of these developments, NCTY is best avoided now.

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NCTY shares were trading at $55.40 per share on Tuesday afternoon, down $26.17 (-32.08%). Year-to-date, NCTY has gained 1,464.97%, versus a 3.10% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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