Is LKCO Able to Sustain its Profitability?

Shares of Small-cap Software company Luokung Technology were up 1.6% during today's morning session, as the S&P 500 posted a 0.1% change. Today's upwards movement shows that investor interest in LKCO stock is strong -- but how closely have they studied the company's margins?

While Luokung Technology's gross margins for the last year are positive, we are concerned that the company's operating margins are in the red. Gross margins take into account only the cost of revenue, or variable costs -- meaning the cost directly associated with producing the products or providing the service offered by the company.

Operating margins, on the other hand, take into account the company's overhead as well. Overhead, also called fixed costs, includes the company's rent, salaries for personnel not included in cost of revenue, equipment and supplies, amortization, and depreciation. Operating margins tell you about how efficiently Luokung Technology is run, and gross margins tell you how profitable its product line is.

Since Luokung Technology's cost of revenue is growing at an average 438.7% per year, while its total revenues have a 226.9% growth rate, the only explanation for the widening margins is that the company is increasing its prices. Since prices cannot be increased indefinitely, Luokung Technology's gross margin growth will eventually slow unless it can get its cost of revenue under control.

The table above tells us that, on average, Luokung Technology has not been profitable over the last four years, which should be a warning sign to prospective investors. Indeed, the company's operating margins are sinking at rate of -59.4%