Investing in a stock that has recently gone public can be tricky. Information on companies can be limited and analyst coverage can be sparse. Generally, however, companies administer initial public offers to raise capital to fund product development and expansion. In an IPO, investors can buy shares of companies with the potential to grow their top-lines quickly and benefit from market-beating returns over the long-term. But it’s an investment for people with a higher risk appetite. New company dreams can easily turn to disasters.

China-based technology firm UTime Limited (UTME - Get Rating) conducted a blow-the-doors-off IPO earlier this month, in which its stock opened with triple-digit percentage price gains. The stock has delivered a 12x return in less than a month. So, the question is, do UTME’s financials and market prospects justify the exuberance of its IPO investors and can the stock sustain its initial upward trajectory?

Let’s look at what the company does and if it makes sense to invest in this stock right now.

What does UTime do?

UTime is engaged primarily in the design, production, and sales of mobile phone accessories and related consumer electronic products. It also provides EMS or electronic manufacturing services and  OEM (original equipment manufacturers) and ODM (original design manufacturers) for several brands, including TCL Communications, Haier Electronics, and Quality One Wireless, among others.

UTime’s operations are based in China but its products are sold worldwide , including emerging markets including India, Brazil, and South Asia and  the U.S. and European markets.

In India, UTime has gained considerable traction and has engaged with 300 distributors and established  more than 800 after-sales outlets in the country.

UTime stock has soared post IPO

UTime  priced an equity IPO  early this month. The company offered 3.75 million shares at $4 per share, raising $15 million in gross proceeds. This implied  a UTime market cap of $33.1 million. On April 6, UTime stock opened trading at $11.4 and hit  a $46  per share high before ending the day at $39.

UTime stock is currently trading at $47 per share, which suggests its market value is close to $390 million, a return for the IPO investors of a staggering 12x in less than a month. This whopping  rise in UTime’s share price reminded old-time investors about the dot-com boom and perhaps for good reason.

UTime is not yet a profitable company. In fact, it experienced a decline in sales in 2020. The company reported $27.3 million in sales and a $3.1 million net loss in 2020. Its sales in 2019 were  $36.7 million, with a $1.88 million net loss.

UTime stock is currently valued at a 14.2x trailing price to sales multiple, which is very  steep for a company that is grappling with negative profit margins and falling sales.

What next for UTime investors?

IPO investors have profited handsomely  over the last month since the IPO, but current investors should expect UTime stock to remain volatile in 2021. India is one of the company’s largest markets and the country is currently suffering badly from the COVID-19 pandemic, with a massive surge in  cases currently. Several states have announced lockdowns, which will continue to hurt UTime’s revenue in the near term.

UTime has been  unable to minimize its  costs in the last year. While its sales fell by close to 20% year over year, and its gross profits fell 23%, its operating costs were up 12% year over year in 2020.

UTime is now seeking  to expand into other emerging markets and developed economies. It also aims to expand and diversify its product portfolio. However, the stock remains a high-risk bet given the several  uncertainties surrounding its India market and its  less than impressive financials.

Bottom Line

UTime is China-based technology company with worldwide markets, including the U.S. and emerging markets. India is one of its largest markets. The company conducted a remarkably successful IPO this month, from which investors have so far profited nicely. But the company’s dependence on its Indian market as India is wracked with COVID-19, along with its poor financials and height stock valuations, make UTime a high risk bet currently.

UTME shares fell $0.90 (-1.90%) in after-hours trading Wednesday. Year-to-date, UTME has gained 21.54%, versus a 12.01% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditya Raghunath

Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist. More...

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