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How Far Will ResApp Health Ltd Crash?

One thing I see repeatedly on the small-cap end of the spectrum is highly speculative tech stocks getting very hyped-up amongst retail shareholders.

Recent examples include Ziptel Limited (ASX: ZIP), 1-Page Ltd (ASX: 1PG), and Reffind Ltd (ASX: RFN). The chart below shows how shares in these companies climbed hundreds of percent, before falling back down to more-or-less where they started.

Screen Shot 2016-06-28 at 9.37.45 am

An awful lot tends to be written about these companies on the way up — and on the way down — but there is often very little in the way of hard nosed analysis when there is excitement in the air. After all, there’s not much incentive for anyone to tell people that their sky rocketing shares are vastly overvalued.

I thought Ziptel was particularly egregious. In this post (members only) from the Motley Fool Hidden Gems discussion boards, I warned some of our subscribers it was too risky.

Of course, when calling a company over-hyped, you risk speaking up too early, and looking silly as a result. That’s what happened with ZipTel: it actually more than doubled after I thought it was over-hyped. But now it is well under half the original price when I called it over-hyped. It is an example of the madness of markets.

One company that I think is currently over-hyped is ResApp Health Ltd (ASX: RAP). It has a market capitalisation of over $230 million (edit: including escrowed shares), even after today’s whopping 15% fall.

Usually, I wouldn’t usually bother calling a stock over-hyped, but I recently had someone tell me on twitter that they would “bet the house” on ResApp. Therefore, I wanted to put out a piece to warn our readers that this most definitely would be a terrible idea. First, because betting the house on anything is ludicrous, and second, because ResApp itself looks nothing like a bargain.

As recently as April the company raised $12.5 million by selling shares at 20 cents each. That seems like a fairly full price given the company does not even have a revenue stream. That means that it will need to continue to raise capital in order to fund its business.

I believe it would be extremely expensive to drive widespread uptake of the company’s phone applications as a diagnostic device. The reason for this is that doctors generally do like to see a patient when possible, and although tele-health is certainly growing, I’m not convinced the best use of effort is to try to move diagnosis itself to being over the internet.

There is plenty of low hanging fruit where tele-health can make an impact, in particular for check-ups of chronic diseases that may require a repeat script, such as depression, diabetes or acne.

As an asthmatic I have been diagnosed once in my life but seen doctors about it very many times. Indeed, over in the US asthma patients must go to a doctor just to get an albuterol inhaler. The idea that society would spend money on an smartphone app to diagnose asthma, when there is so much waste in getting asthma treatment (once you already know what you need) is very sad indeed.

I believe that the entire finance media is skewed towards telling people what to Buy: after all, you don’t win friends by saying, “Sell”. Nonetheless, I must confess that I would not hold ResApp shares at current prices, since I prefer to invest in companies that are growing profits, and preferably paying a dividend. Rollercoasters are fun, but you often end up back where you started.

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Motley Fool contributor Claude Walker has no position in any stocks mentioned. You can follow him on Twitter @claudedwalker.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.