In an expansive universe of U.S.-listed Chinese equities and cloud computing names, Taoping (NASDAQ:TAOP) isn’t the one to consider. On either account. If you haven’t heard of Tapoing stock, that’s alright. In this case, ignorance may be bliss.
The company has two primary businesses segments: traditional information technology and cloud computing, where it operates in the ultra-hot software-as-a-service market.
Point number one in the avoid Taoping case is the fact that the stock is down 17.26% year-to-date while the BVP Nasdaq Emerging Cloud Index is higher by almost 64%. Even if one wants to compare the Chinese name to a more traditional cloud benchmarks, the ISE Cloud Computing Index is up more than 33% this year.
Point number two is name a China index, such as the MSCI China Index or the MSCI China Information Technology 10/50 Index, and there’s a 100% chance it’s trouncing Taoping stock this year.
There’s a valuable lesson here, that being that if an investor wants to embrace a leading sector or industry, it’s best to do so with that group’s leaders instead of bottom fishing.
In the case of cloud computing equities, as the above data indicate, Taoping qualifies as a bottom dweller and reminds investors that cheap stocks (it closed at $2.78 on Aug. 25) are cheap for a reason.
Don’t Tussle With Taoping Stock
I’m not saying Taoping is another Luckin Coffee (OTCMKTS:LKNCY). There doesn’t appear to be fraud at play with the tech company, but this is the type of name that lures unwitting investors in with a low price tag only to further decline.
Taoping recently executed a reverse-stock split to the tune of 1-for-6 to stay in compliance with the Nasdaq’s $1 listing requirement. That objective has been achieved, but the stock is steadily giving back the price gains artificially accrued via the reverse split. On July 30, the day of the reverse split, Taoping stock briefly traded around $9, meaning it’s lost more than two-thirds of its value in less than a month.
As for business legitimacy, Taoping does appear to have that. It recently announced 15 new members for its smart screen alliance and it’s news feed is chock full of similar announcements.
Still, investors ought to ponder why this stock struggles so much and what’s going wrong in its cloud business. After all, China is the second-largest cloud computing market in the world after the U.S. Cloud infrastructure spending there surged 63.7% last year and there’s plenty of runway for growth because as a percentage of overall tech spending in China, is still relatively low.
Investors should take pause with Taoping because the company isn’t capitalizing on relevant trends in its home market.
Bottom Line: Toss Taoping
As if its market capitalization of barely above $20 million and inability to capture a credible slice of an obvious growing market aren’t enough to square investors off, perhaps the aforementioned reverse split ought to be.
While there are some examples of companies engaging in reverse going to deliver better outcomes for shareholders, history proves these examples are few and far between. A study by the University of Washington School of Business indicates that while reverse splits serve the aim of increasing share prices and do bolster liquidity, many investors sell on those announcements because they believe the new higher share price is starting point for more declines.
Taoping is proving that thesis accurate and is reminding investors about the risks inherent with Chinese micro-caps. Until this name can organically increase its share price, a dubious prospect today, investors can and should find other Chinese and cloud stocks to consider.
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.