Long-time readers should note some significant changes in how I communicate in the public domain. The primary purpose of this forum is now to attract new contacts with professional industry expertise to share research and receive feedback (confirmation / refutation) regarding my investment theses.
Accordingly, this document should not be construed as an endorsement or recommendation of the companies or securities discussed herein. I am not an investment advisor and this is not an investment thesis. It is merely one part of the story, which I present for debate in hopes of determining all risks and upside potential. The disclosure at the end of this piece is critical to understanding the content of this document. Further, I frequently trade my positions and may buy, sell, or short the securities mentioned herein at any time, regardless of the facts or perceived implications of this article.
Smith Micro (SMSI) Tours NYC
“They seemed pretty confident about Sprint ramping up. Admitted that it has gone a bit slower and there were some ‘learnings’ along the way. A little defensive but I liked the guys.”
“Risk reward seems good here…”
That came to me from a Wall Street veteran who had a one-on-one meeting with SMSI’s management team in NYC this week.
I’ve received several emails, providing feedback and requesting my analysis. Also, Geoinvesting, a well-regarded stock research service visited with SMSI management. In this morning’s newsletter to subscribers, they suggested that an update will be forthcoming. Considering the info I’ve gathered from other attendees, I anticipate an upbeat write-up.
FYI, SMSI gave its standard investor presentation at 12:30PM ET on Monday. Since then, they have been conducting one-on-one meetings, continuing through later today.
The stock has provided an interesting lesson in trading this week.
First, it reacted negatively on Monday. The action sniffed of retail panic. Retail traders can be funny. Expecting professional investors to jump on SMSI within hours of making a standard presentation is silly. Professionals need to digest the presentation, run the math, and do follow-up Q&A with management (among other things).
Sure enough, Tuesday’s action saw SMSI recover all of Monday’s losses and more. This was a loss for nervous investors who sold out, but a win for those with more patience. Of course, two days is not enough time for professional investors to react either. Thus, Tuesday’s action was likely just a snap-back to rectify Monday’s hasty move.
So, what does the chart tell us? A few things…
1. We’re sitting near the bottom of my risk/reward channel.
2. The stock has been consolidating since mid-March (in between the two gray lines)
3. It’s basically stuck between its support level (the lower channel line) and multiple points of resistance (the 50 day moving average, the 200 DMA, and the gap at $2.00 represented by the thick horizontal line).
4. A break above the $2 level should technically signal the beginning of a new bull phase that could take the shares to $4.50.
More Importantly, What Did SMSI Say?
The quote at the beginning of this article sums it up nicely. Things started slower than they expected due to some “learnings” that were required for this roll-out. However, things are now moving along and they are confident about Sprint ramping up.
That’s 100% in line with my impression. They are well past 100,000 downloads (Android + iOS) and Sprint has outlined its ramp-up plans. For example, I’ve heard that their store personnel will be trained on selling the product within weeks and they are hoping to double their installed base within a year.
That would give them an estimated 700,000 customers. For SMSI, that would equate to $28 million in annual revenue, over $19 million in incremental operating profit (per management’s guidance of 70% operating margins). That will drop to the bottom line, thanks to its NOLs, which will “reduce future cash payments for income taxes” according to its recent 10-K filing.
That’s over 75-cents per share.
FYI, according to its 10-K, SMSI had federal and state NOL carryforwards of approximately $151.0 million and $147.8 million, respectively, as of December 31, 2017. In total, SMSI’s deferred income tax assets are valued at $52.9 million, but written down to $0 on SMSI’s balance sheet. So, assuming SMSI can simply start operating a profitable enterprise, its tax assets alone are currently worth more than the company’s market cap… a great hidden asset for a company on the cusp of re-achieving profitability.
Beyond that 75-cents per share, the company plans to divest two of their product lines fairly soon. From what I’ve gathered, these divestitures will make the P&L will look markedly better, raising the upside potential and lowering the downside risk.
So, with an estimated 200,000 total downloads to date, the million dollar question is:
“What are the odds of Sprint kicking Smith out at this stage?”
Based on Sprint’s actions, the download figures, and SMSI management commentary, I believe the answer is close to 0%. If that’s true, then investors should be focused on the fact that Sprint is planning a hard switch-over (completely killing the old product in favor of Smith’s — a.k.a. “sunsetting”) of the entire 300,000-400,000 customer base within weeks.
At that point, SMSI will be earning about $10 per customer per quarter, adding greatly to the revenue they are already earning from the ~200,000 downloads to date (keep in mind, there are an estimated 4 downloads per “customer”, because this is a family-focused product).
That will be enough to deliver positive earnings within a few months, putting SMSI on its way toward the aforementioned 75-cents of EPS. Choose any P/E you like and you can value the company from there.
By the way, some investors are concerned that Sprint is its only major customer (it has many smaller engagements). That’s accurate, but has been the case from day one. The Sprint deal is intentionally the only major customer right now. SMSI management is using this engagement to perfect the product and roll-out process.
The company has other deals queued up around the world (including a potential monster in Europe). The pipeline is just waiting for that process to be solidified (and then, for SMSI to shift its bandwidth/attention from rolling out Sprint to rolling out others).
I’ll have more on SMSI’s trip before the weekend. Stay tuned.
Facebook (FB) Rebounds On Mark Zuckerberg Testimony: This week, Zuck is in Washington to answer questions on Capital Hill. Investors were obvious satisfied with yesterday’s results. The stock had its best day since November and hit its highest level since March 22.
Despite that, the stock remains 15% off of its high. Assuming that new rules, policies, and/or regulations cut into FB’s earnings potential, the discount may be warranted. However, either way, I don’t see it hindering FB’s growth from whatever its new level of potential might be.
Therefore, I expect the stock to find a new “fair value” level (which may be around these levels) and then continue its growth/appreciation from there. The saga isn’t over yet, but the penalty for its stock may have already been served.
FYI, part of yesterday’s testimony involved child protection & social media addiction. This feeds right into the heart of Smith Micro’s (SMSI) SafePath / Safe & Found application. Just a data point for consideration.
RADCOM (RDCM) Gets A Positive Write-Up: A new article outlines the case that RDCM is being primed for acquisition.
MoviePass (HMNY) Expecting To Buy 20% Of All Movie Tickets By Year-End? This stat came straight from Ted Farnsworth this week. Ordinarily, this would impact my cash burn and dilution forecasts (for the second time in two weeks). However, I strongly suspect that a meaningful portion of that 20% is expected to come via its Moviefone acquisition.
Otherwise, the 20% figure implies that its expected 6 million subscribers will go to an average of 6 movies in December. Not even a heavily-invested bear would believe that. Accordingly, I’m not altering my model to reflect Ted’s latest comments.
As a reminder, my publicly-available model is not based on my thoughts and/or opinions! It’s largely based on information I’ve gleaned from directly from management’s (Mitch & Ted) public interviews, industry sources (like the MPAA and BoxOfficeMojo), and the bullish analysts’ reports.
To account for any inconsistencies between what Mitch says and what Ted says, I’m now maintaining two separate tabs in the model. The official model is the Mitch model. For now, I have incorporated the 20% figure into the Ted model, just so folks could see that it makes no sense (and therefore warrants no additional panic or concern).
My cash burn estimate remains fixed at $700 million for 2018. Barring a substantial change to their pricing/service model, I estimate they will need $600M in new funding before year-end.
For the record, I don’t think that is going to happen. I believe they will choose (or be forced) to make a strategic move before then. I have doubts that the public markets will give them another $600 million this year under any terms. I’ll explain why in a moment.
At this point, I suspect that their most-likely move will be to push for subscriber critical mass through the fall and then put its first usage limit in place. That would explain the decision to stop offering annual memberships. Under the monthly plan, it will be much easier to institute a usage limit. Under an annual plan, heavy users could rest assured that they can attend movies with no limits for the next 12 months.
I see no other reason to stop offering the annual plan. It was bringing in much-needed up-front cash, delaying the next round of funding.
In other words, there are/were pros and cons to the annual plan… with the main con being an inability to change the rules.
Speaking of the next round of funding…
Barring a major change to their operations, savvy investors (and anyone consulting my model) can conclude that yet another $100 million will be needed very soon after the upcoming round. Yes, I believe that two rounds will be needed in the next three months.
Short interest has more than doubled since year-end and currently sits at record levels. I believe that many investors have been shorting the stock in anticipation of (and the intent of participating in) the next round of funding. Basically, if you short the stock at $3.00 and participate in the round at $2.50, your participation effectively covers your short with an easy and instantaneous $0.50 per share profit.
That being said, short interest, despite being a record 11 million shares, only represents about one-fourth of the 40 million shares (at $2.50) that I estimate will be required to raise their next $100 million (because a 35% discount has characterized their last two rounds).
I’ve rarely seen a round like that, so I don’t know if enough investors will participate to represent 40 million shares, especially if many of them are in it for the quick flip, as the trading action implied after the last two rounds.
No matter what, they’re pushing the limits of conventional funding. We’re about to find out if the limits can be pushed further…
… and even if they can, it will only be enough to fund them through June. Another round will be needed a month later.
One Final Data Point
I think it’s good that MoviePass continues to sign new exhibitors. However, everything is about context. Data points are not supposed to be equally weighted. To illustrate this, just look at the market share numbers below.
Note that the Big 3 dominate, with about 50% of all screens in the U.S./Canada. In other words, MoviePass can sign literally hundreds of deals and still not gain 50% share, which I believe to be a critical step for them to achieve profitability.
We need to see them land members of this Top Ten list:
Landing chains like Landmark is not a big deal, no matter who is quoted in the press release. They can’t generate meaningful exhibitor revenue unless the Big 3 cave in… and as I’ve said many times before, they like the benefits of MoviePass, but not if it means giving up their strategic position in the industry… and that’s exactly what MoviePass is trying to do.
This is why AMC won’t even come to the negotiating table.
While the monetary benefits are nice, they would rather see MoviePass die than give up any of their strategic industry power. Business Strategy 101 dictates that the Big 3 utilize a “starve them out” strategy. If they stand together (without risking the appearance of illegal collusion) and refuse to deal with MoviePass, they can force MoviePass to continue raising money until they either achieve critical mass or die trying.
Either way, the big chains benefit (for now). Either MoviePass goes away or they get to enjoy the free benefits until its 100% clear that they have to negotiate.
The next round of funding should tell us a lot about how this battle is going to end.
Citron Provides Another Short Idea
Citron Research has released a short thesis entitled “Hailiang Education: China Hustle Déjà Vu“. In it, they compare Hailiang (HLG) to Longfin (LFIN), a stock which I shorted in my personal account. They also negatively compare HLG’s underwriter to Maxim (one of HMNY’s underwriters). Just some FYIs for you.
- AEHR Grows 175% — Beats On The Top & Bottom Line (Buying More)
- GAIA vs. MoviePass: CAC Shows Which One Is A True Mini-NFLX
- Major Update on SMSI
- SMSI’s Safe & Found App: 100,000 Downloads & Counting
- MoviePass Projected To Burn $600M In 2018
- SMSI: Riding A New Trend & Making Its Latest Comeback
- Mark Gomes Research
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Disclosures / Disclaimers: I am long SMSI, FB, and RDCM. I have no position in HMNY or HLG, but may do so in the future. That being said, this is not a solicitation to buy, sell, or otherwise transact any stock or its derivatives. Nor should it be construed as an endorsement of any particular investment or opinion of the stock’s current or future price. To be clear, I do not encourage or recommend for anyone to follow my lead on this or any other stocks, since I may enter, exit, or reverse a position at any time without notice, regardless of the facts or perceived implications of this article.
I am not a financial advisor. Nor am I providing any recommendations, price targets, or opinions about valuation regarding the companies discussed herein. Any disclosures regarding my holdings are true as of the time this article is written, but subject change without notice. I frequently trade my positions, often on an intraday basis. Thus, it is possible that I might be buying and/or selling the securities mentioned herein and/or its derivative at any time, regardless of (and possibly contrary to) the content of this article.
I undertake no responsibility to update my disclosures and they may therefore be inaccurate thereafter. Likewise, any opinions are as of the date of publication, and are subject to change without notice and may not be updated. I believe that the sources of information I use are accurate but there can be no assurance that they are. All investments carry the risk of loss and the securities mentioned herein may entail a high level of risk. Investors considering an investment should perform their own research and consult with a qualified investment professional.
I wrote this article myself, and it expresses my own opinions. I am receiving no compensation for it, nor do I have a business relationship with any company whose stock is mentioned in this article. The information in this article is for informational purposes only and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
The primary purpose of this blog/forum is to attract new contacts with professional industry expertise to share research and receive feedback (confirmation / refutation) regarding my investment theses.