Investing lesson: How to avoid 97% losses by not buying into hype

The rise and fall of Facedrive (TSX:FD), an eco-friendly ride-sharing company, was quick and swift. FD pivoted several times throughout the years with its core business — from food delivery and online retail to even contact tracing for COVID.

The one thing it succeeded in was convincing people to invest:

• The rise: Between 2020 and 2021, FD’s stock rose from $2 to $60 in just over a year.
• The fall: Since Feb 2021, its stock fell 97% and yesterday, news revealed FD was considering filing for bankruptcy.

Peter Hodson (via FP) shares some reasons for FD’s downfall — by telling us to look at why it was even trading at that level in the first place…

Expensive AF: Weak fundamentals and extreme valuations sum up FD nicely. FD reported first-quarter sales of $4.2m — up sharply from the previous year but overly expensive with a 224x price-to-sales multiple at its peak.

• According to FP, only 41 of 21k companies in North America had a higher valuation.

Chasing the next “big” thing: Facedrive had a habit of entering hot sectors (i.e. incorporating ESG to ride sharing, launching a COVID tracing business) and using press releases to draw investors in. Most were of little importance but were used to show “momentum”.

• FD lacked focus and failed to build a profitable business in any of the sectors it entered.

Lead by example: Management team had a poor track record with previous ventures and in August, its CEO and CFO announced their departures — sending the stock even lower.

• While perfect track records aren’t required, they should have prevented the stock from reaching such levels.

In hindsight, Facedrive’s fall almost seemed inevitable. But hype blinded investors — becoming an expensive lesson for many.