While there is currently no investment hotter than cryptocurrencies, the digital-currency enthusiasm is steadily extending to non-fungible tokens (NFTs), which appear to be the new favorite of retail investors. NFT is a type of digital asset that represents a unique digital ownership of certain physical items that are stored as a unit data over blockchain, the digital ledger technology that powers cryptocurrencies, according to Wikipedia.

Shares of online-art trading platform Takung Art Co. Ltd. (TKAT) were  out of favor for several years. However, investor sentiment  has recently shifted, and many investors are speculating that TKAT could enter the NFT space and adopt the technology to enhance its art trading platform. The company’s electronic online listing platform allows artists, art dealers, and art owners to offer and trade their valuable holdings—including paintings, calligraphies, jewelry and precious gems—in an open market.

TKAT was trading at $1.36 at the beginning of this year. The  stock has rallied as high as 3,535% so far this year. Though the stock retreated  31.67% intraday in yesterday’s trading session to close at $36.76, TKAT is still up a massive 2,383.8% year-to-date. Let’s take a closer look whether TKAT can continue this incredible rally going forward.

How Did the NFT-craze Start?

The excitement around NFTs exploded during the COVID-19 pandemic as people spent enormous sums of money on artworks and other items that exist only online, with some selling for tens of millions of dollars. But NFTs really hit the mainstream big-time after digital artist Beeple sold a digital painting titled “Everydays: The First 5000 Days” for a whopping $70 million in a Christie’s auction earlier this month. This sale brought a wave of new attention to the world of NFTs.

Some of the more notable NFT sales include Twitter (TWTR) CEO Jack Dorsey’s first-ever tweet (authored in 2006), which auctioned for about $2.9 million, Toronto-based artist Krista Kim selling an NFT-backed digital home for more than half a million dollars, the Time magazine sale of NFT magazine covers, and the NBA launching its own NFTs through digital trading cards on the platform NBA Top Shot.

TKAT’s Bleak Financial Position

TKAT’s revenues and total assets have declined at CAGRs of 34.1% and 19.6%, respectively, over the past three years. The company generates multiple streams of revenue, including listing fees, trading commissions, management fees and authorized agent fees. In the third quarter (ended September 30, 2020), TKAT reported a top-line of $0.685 million, declining 39% year-over-year and 59% sequentially. In fact, the company did not generate any revenue from listing fees. Its loss from operations widened to $0.5 million from the quarter-ago loss of $0.07 million. However, TKAT did manage to turn a small profit due to currency gains. Its EPS for the quarter was  $0.01 compared to the year-ago loss of $0.10 per share.

Stretched Valuations

In terms of is trailing-12-month p/s ratio, TKAT is currently trading at 93.36x, 4,721.8% higher than the industry average  1.94x. TKAT is trading well above the industry average in terms of trailing-12-month p/b also (74.77x versus 2.81x).

Bottom Line

Given the rapid pace of global digitization, the market has been very upbeat regarding  the blockchain applications, and both retail and institutional investors have been enamored by the growth prospects of the crypto space. NFTs have been around since 2012, but these digital collectibles have recently begun capturing artists’ attention who see NFTs as an innovative way to monetize their works. However, experts believe that the items held as NFTs can be easily replicated, while many analysts see NFT as just another manifestation of bubbling market mania.

Despite its lack of consistent revenue or earnings, investors have been betting on TKAT to take advantage of the NFT boom. The stock has garnered  momentum purely on speculation and optimism. NFT’s incredible momentum could continue in the near-term. However, there is no clarity on whether TKAT is truly entering the NFT space. Hence, we believe TKAT has run too far too fast, and even a slight hint of profit booking could put selling pressure on the stock. Even though the NFT excitement does not seem like it will fade anytime soon, we think it wise for investors to avoid betting on TKAR until the company unveils its plans.

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TKAT shares were trading at $37.27 per share on Thursday afternoon, up $0.51 (+1.39%). Year-to-date, TKAT has gained 2,418.24%, versus a 4.22% 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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