Is Color Star Technology a Good Entertainment Stock to Buy?

Entertainment technology company Color Star Technology Co., Ltd. (CSCW), which is based in New York City, recently announced that it has continued to increase its investment in product development for its key metaverse project features, which will be launched later this month.

The stock has gained 17.8% in price over the past month to close yesterday’s trading session at $0.65. However, the stock could lose its listing in Nasdaq if it continues to trade below $1.

CSCW stock has declined 21.8% in price over the past three months and 48.6% over the past six months and is currently trading 75.5% below its 52-week high of $2.67, which it hit on March 30, 2021. In addition, it is currently trading below its 50-day and 200-day moving averages of $0.68 and $0.92, respectively, indicating that it is in a downtrend.

Here’s what could shape CSCW’s performance in the upcoming months:

Nasdaq Listing at Risk

On October 27, 2021, CSCW received a letter from The Nasdaq Stock Market LLC, notifying it that it is currently not in compliance with the minimum bid price requirement set forth under Nasdaq Listing Rule 5550(a)(2) because the closing bid price of its ordinary shares was below $1.00 per share for a period of 30 consecutive business days.

Selling Shares to Fund Growth Activities

On June 10, 2021, CSCW announced it had completed a $21.50 million registered direct offering of ordinary shares and warrants. Each unit consisted of one ordinary share and one warrant to purchase 0.7 ordinary shares. The purchase price per unit was $0.68. CSCW plans to use the net proceeds for working capital and other general corporate purposes. However, this could lead to share dilution.

Poor Profitability

In terms of its trailing-12-month asset turnover ratio, CSCW’s 0.06% is 90.1% lower than the 0.65% industry average. Likewise, its 16.89% trailing-12-month gross profit margin is 65.6% lower than the 49.09% industry average. Also, the stock’s trailing-12-month ROCE, ROTC, and ROTA are negative compared to the 8.05%, 4.95%, and 3.43% respective industry averages.

Stretched Valuation

In terms of trailing-12-month EV/S, CSCW’s 37.84x is 751.4% higher than the 4.44x industry average. Also, in terms of trailing-12-month P/S, the stock’s 8.53x is 95.4% higher than the 4.37x industry average.

POWR Ratings Reflect Uncertainty

CSCW has an overall D rating, which equates to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight distinct categories. CSCW has an F grade for Quality, which is in sync with its lower-than-industry profitability ratios.

Furthermore, the stock has a D grade for Momentum. This is justified because the stock has declined 23% in price over the past nine months and 7% year-to-date. In addition, the stock has a D grade for Stability, consistent with its beta of 2.63.

CSCW is ranked last  of 24 stocks in the Outsourcing - Education Services industry. Click here to access CSCW’s ratings for Growth, Value, and Sentiment as well.

Bottom Line

Because the stock looks overvalued at its current price level and its near-term prospects look uncertain, we think it is best to avoid it now.

How Does Color Star (CSCW) Stack Up Against its Peers?

While CSCW has an overall POWR Rating of D, one might want to consider investing in Outsourcing - Education Services stocks with an A (Strong Buy) or B (Buy) rating, such as Lincoln Educational Services Corporation (LINC), Franklin Covey Company (FC) and Benesse Holdings, Inc. (BSEFY).

CSCW shares were trading at $0.67 per share on Friday afternoon, up $0.02 (+2.38%). Year-to-date, CSCW has declined -4.83%, versus a 23.92% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

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