Why I'd dump Versarien plc after six-bagging in a year
The last time I coveredVersarien (LSE: VRS), I concluded that the early-stage graphene company has tremendous potential, and if the group could make the most of the possible market available, the shares could be worth multiples of their price.
At the time of writing this conclusion, the shares were trading at just under 40p. Since then, the stock has rocketed to a high of 114p printed at the end of January turning this firm, which has yet to produce a profit into a six-bagger.
So, would I still buy shares in Versarien today?
Much of the move higher over the past two months has come as a result of new customer agreements Versarien has signed.
At the beginning of December, the firm announced that it had signed a deal with a significant US chemicals manufacturer with the intention of letting the two businesses collaborate on the development of new graphene products. Then, at the beginning of January, the company announced an agreement with a global apparel manufacturer to assess the possibility of incorporating graphene into the partner's products. A few days after this announcement, it told investors it had signed a Letter of Intent to establish a graphene manufacturing centre in China.
Following all these developments, it is clear that the business is moving in the right direction. Its projects are generating interest and partners are coming to the firm looking to work together on projects that should yield revenues and hopefully profits for shareholders.
It cannot be denied that these agreements present a considerable opportunity for the company, but the fact remains that this is still an early stage business, and there's plenty of work to do before Versarien is a self-sustaining entity.
Still, as I noted in my prior article, if the company can turn itself into a major graphene producer, the opportunity is enormous. The global graphene market is projected to expand to $600m per annum by 2025. If Versarien can grow at the same rate, revenue could hit £177m by 2025 (compared to around £9m annualised currently). As I noted before, this is a highly optimistic forecast. The problem is that after its recent rally, almost all of this growth is now reflected in the share price.
At the time of writing, the company supports a market cap of £123m (down from just under £170m at its peak), which is 0.7 times 2025 sales. Industrial stocks in general currently trade at an average price-to-sales ratio of around 1.4, which implies that even if Versarien can do £177m in revenue by 2025, the potential upside is only 100%.
With so much that could go wrong over the next seven years, this risk/reward ratio does not seem attractive to me. With that being the case, I believe that it could be time to dump shares in Versarien after six-bagging in a year. There are other companies out there which offer a much better risk/reward profile.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.