Singularity Looks Overvalued And Its Partners Are In Trouble (NASDAQ:SGLY)

Investment thesis

You’ve probably heard the idiom “don’t fly too close to the sun”, which comes from the story about Icarus and his father Daedalus in Greek mythology. I’m saying this because I think that the list of public companies trading above 400% of their 52-week lows is a good place to find short selling ideas as the fundamentals of some of them aren’t good and there are red flags. Today, I’m taking a look at a company that I think fits these criteria – Singularity Future Technology (NASDAQ:SGLY). Let’s review.

Overview of the business and financials

Singularity Future Technology was founded in 2001 and is a logistics and ship management services company with offices in the USA, China, Australia, Canada, and Hong Kong. It was called Sino-Global Shipping America until the beginning of January 2022 and the reason the firm changed its name was to reflect its pivot to the cryptocurrency business. In February 2021, Singularity announced that it’s accepting Bitcoin (BTC-USD) as a form of payment for its global shipping, freight, and logistics services. In October 2021, it inked an agreement with Chinese chip developer Highsharp for the creation of a joint venture company that will develop and sell bitcoin mining machines under the name Thor. Singularity will initially invest $10 million in the JV company and plans to put about $50 million in it over the next few years. Highsharp, in turn, will exclusively supply high-performance computing chips

According to Singularity’s Q4 2021 financial report, the JV company is named Thor Miner and is based in Delaware. Singularity has a 51% stake in Thor and the latter has entered into an agreement for the sale of certain cryptocurrency mining hardware and other equipment to a company named SOS Information Technology New York. The deal was for $200 million and Thor had already received a $40 million payment as of February 14, which is the date of the Q4 2021 financial report of Singularity. In my view, there are a couple of red flags here. First, several media sources revealed in November 2021 that Chinese crypto mining hardware maker Canaan Creative (CAN) is suing Highsharp over patent infringement for $14 million. Canaan alleges that Singularity’s partner Highsharp and Sichuan Yinbimei Technology ripped off its designs. Second, SOS Information Technology New York was founded in July 2021 and is owned by Chinese cryptocurrency miner SOS (NYSE: SOS).

In February 2021, short-sellers Hindenburg Research and Culper Research took a shot at SOS by raising concerns ranging from regulatory risk to alleged false claims by the company about its business. In February 2022, the company revealed that it received a subpoena from the Securities and Exchange Commission resulting from the Hindenburg Research report.

Turning our attention to the financial results of Singularity, we can see that the company’s quarterly revenues barely top $1 million at the moment. General and administrative expenses are two times higher and in Q4 2021, Singularity also booked a $6.1 million loss from write-offs from the non-controlling interest of SinoChina, which was a Variable Interest Entity (“VIE”) that had no operations. Overall, I think the logistics business of Singularity shouldn’t be worth much at the moment.

The balance sheet looks strong though as Singularity had $51.4 million in cash and its only debt included $10 million in convertible notes.

Those notes bear interest at 5% per year and can be converted into common shares at $3.76 per share. They can be converted at any time starting June 2022, which means that the share count is likely to increase by 2,659,574 unless the share price of Singularity declines significantly over the next three months.

As you can see from the chart above, the market valuation of Singularity has soared by almost 80% since the news about Thor’s $200 million order from SOS came out and it stands at $253.4 million as of the time of writing. In my view, Singularity looks overvalued at the moment as its cash stockpile is earmarked for investment in Thor, whose future is likely to be turbulent considering its chip supplier is being sued for patent infringement while its main customer recently received a subpoena from the SEC. I’m not sure why SOS is still betting on the crypto mining business considering China banned all domestic crypto mining in June 2021, and then outlawed cryptocurrencies outright in September 2021.

In any case, I view Singularity as expensive at the moment and I expect there to be significant issues for that $200 million order in the near future. It seems likely that the share price could come back below $3.00 per share, just like it did in February 2021 and I think this could be a good moment to open a small short position. According to data from Fintel, the short borrow interest rate stands at 12.46% as of the time of writing.

Looking at the risks for the bear case, the main one is that Highsharp wins or settles its Canaan lawsuit and SOS follows through on its $200 million order. It’s impossible to estimate how high the probability of this taking place is. We also don’t know what are the margins of Thor are at the moment or how much investment the company will need in the next few years. In view of all of these uncertainties, I think that a short position should be paired with call options expiring in 2023 to hedge against the risk.

Investor takeaway

I find Singularity Future Technology to be an interesting company as it’s pivoting from logistics to Bitcoin mining machines. The revenues of its logistics business are small but the balance sheet is strong as Singularity had over $50 million in cash as of December.

Thor has received a $200 million order from SOS but we don’t know what the margins are and I have serious doubts whether the order will be completed considering Highsharp and SOS are shrouded in controversy. Overall, I think the share price of Singularity could decline below $3.00 per share if things don’t go smoothly and this seems like a good opportunity to open a small short position. There are a lot of uncertainties, so I think it’s a good idea to hedge against risks through put options.

For risk-averse investors, I think it could be best to avoid Singularity as I perceive this as a high-risk, high-reward type of opportunity.