Markets

Here's Why WiMi Hologram Cloud Stock Is Crashing After Posting Impressive Gains

What happened

Shares of WiMi Hologram Cloud (NASDAQ: WIMI) are coming back down to earth after an unbelievable rally over the past week. There's no news specific to WiMi to explain the drop, but then again, there wasn't much fundamental reason for the stock's previous rise, either.

As of 12:45 p.m. EDT, WiMi Hologram Cloud stock was down 25%.

A frustrated man lays his head on the table with a downward-sloping red chart arrow in the background.

Image source: Getty Images.

So what

Last week at the World Artificial Intelligence Conference, Alibaba founder Jack Ma and Tesla co-founder Elon Musk gave presentations via holographic projections, according to a press release from WiMi. The press release also expounded on the astronomical expected growth rate in holography through 2025. This provided enough hype to fuel WiMi stock's incredible gains.

However, WiMi Hologram Cloud generates revenue in two primary ways, and neither is by holograms directly. The company has an advertising revenue segment that accounted for 84% of revenue in 2019. This segment creates advertising campaigns for its clients to be displayed in various ways, including on social media platforms.

WiMi's other revenue segment is entertainment. This segment primarily generates revenue by providing middleware software between mobile games and payment solutions. The company's technology expands the payment options available to the consumer, and when they pay, WiMi gets a cut of the in-app purchase.

Since neither of these revenue segments generates revenue directly from holograms, it seems WiMi's previous gains were more hype than substance. Furthermore, it's also unclear from last week's press release which company powered the Ma and Musk holograms. There's nothing that explicitly attributes it to WiMi.

If the stock gained on hype, then it's not surprising to see it fall as enthusiasm wanes. And considering it's still way up over the past five trading sessions, it could have much farther to fall.

WIMI Chart

WIMI data by YCharts.

Now what

If you're an investor excited about the potential of hologram technology stocks, there's certainly nothing wrong with adding WiMi Hologram Cloud stock to your watch list. The company claims to have more patents than any other player in China and image processing speeds 80% faster than the industry average. That could be valuable.

However, if there's truly an upside opportunity here, it will bear out over time. No need to rush to purchase shares in fear of missing out. I would personally wait until WiMi announced results demonstrating how it's monetizing its hologram technology more directly before even thinking about investing in this stock on a hologram-bull thesis.

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Jon Quast has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alibaba Group Holding Ltd. and Tesla. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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