It seems like colossal stock swings is the theme for 2021. First, GameStop stock made headlines with its 9,000% surge in a month. The uproar still seems far from over, by the way! Here in Canada, Facedrive (TSXV:FD) got investors reminded of the GameStop stock recently. This ride-sharing stock was trading below $2 in March last year while it zoomed to $60 levels in February 2021.
Top growth opportunity or irrational exuberance?
FD stock has seen some pullback and has corrected by almost 30% since last month. It is currently trading at $42, still sitting at some hefty gains for the year.
While some analysts have claimed it as the next Tesla, it is not even close to Uber or Lyft. Investors’ exuberance has indeed made Facedrive one of the most overvalued companies though. It dons a market capitalization of $4 billion at the moment. Notably, the company is not even generating million-dollar revenues annually.
New investors might fall prey to the stock’s enticing surge. However, it is necessary to dig a little deeper if you don’t want to get caught on the opposite side of the trade.
Facedrive is mainly a ride-sharing company that offers riders EVs, hybrids, and conventional gas-powered vehicles. It was just getting started to see some encouraging operational growth last year, but soon the pandemic knocked on the doors.
Too many verticals — too little growth!
It expanded in multiple verticals during the pandemic, but none of them have seen a well-founded growth so far. Food delivery is one of them and forms a small part of its total revenues. Ride-hailing is its mainstay and brings 70% to its total revenues.
Millennials might find Facedrive’s climate-friendly business model appealing. Many traditional ride-sharing companies felt the heat from investors because of their lack of concern for the environment. So, Facedrive stands tall among them. But it will not be a too bigger deal for established players to turn their fleet green. Facedrive might lose its sheen then.
Whichever way you put it, Facedrive stock has gone too far too soon. The stock is trading 4,000 times its sales, probably one of the most stretched valuations out there.
Does its recent fall suggest an opportunity to enter?
Not to me! The stock has fallen only 30% from the top and could continue to see more weakness. More importantly, investors should watch for its operational developments, which should be seen in its revenue growth.
The stock will likely keep on trading with high momentum, but valuation should play a bigger role in the short to medium term. We have plenty of examples in the past that have surged in a short time but plunged even faster. Facedrive stock seems a risky bet at the moment. The safest strategy for long-term investors would be to stick to fundamentals and forget the short-term noise.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned. David Gardner owns shares of GameStop and Tesla. Tom Gardner owns shares of Tesla. The Motley Fool owns shares of and recommends Tesla. The Motley Fool recommends Uber Technologies.