Smith Micro (SMSI) Trading Analysis: Supply/Demand In Focus

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.

 

Before we begin, the truly big news this week is that Sprint and T-Mobile are reportedly close to completing a merger agreement. Sources believe that a deal could be struck as early as next week.

I’ve already written about this in a recent blog post, so check that out.

Cheers

 

SMSI Trading Analysis

Anyone who knows me already knows that I have a sizable core investment in SMSI. For those who don’t already know, I’ve also substantially increased my trading position in SMSI over the past several weeks (at prices as low as $1.50, I’m happy to say).

The reason is simple.

Back on January 31, I signed an NDA and was informed that SMSI was seeing a round of funding. Due to that NDA, I couldn’t sell any shares or tell anyone about the funding.

However, I knew that other people wouldn’t play by the rules. The stock was going to drop until the funding was complete… and I was going to have to incur losses all the way down, despite (no… actually, because of) knowing what was coming.

Worst of all, the round wasn’t completed quickly. Mr. Smith knows what he has and didn’t want to give up shares cheaply. Who can blame him? He recently increased his investment significantly and has a fast-ramping relationship with Sprint.

Unfortunately, that’s not how things work on Wall Street. When the sharks smell blood, they don’t care about value. They attack… and attack they did.

By the time they were done, the stock had fallen from from its 52-week high of $3.41 and closed at $2.15 on March 2nd. The next day, they announced a $5 million private placement of 2.86 million shares at $1.75 per share (plus a warrant entitling the investors to buy shares at $2.17 per share).

Over the next three days, the shares got down to $1.46 on 3 million shares of volume (fairly close to the 2.86 million shares offered). Over the next week, the stock stabilized and has been forming a bullish pattern that has seen SMSI close the March gap and push higher. In the process, it also punched above the 50 and 200 day moving averages.

Capture

 

So, what comes next?

As most of you know, I’m not a technician. I’m a pure analyst in every sense of the word. So, I’ll leave the technical analysis to the day traders and give you an analysis that nobody else will — I’m going to review the recent buying, selling, and shorting to help determine whether the bulls are about to gain control from the bears.

Let’s jump in…

First, I’ve added a tab to my SMSI Income Statement forecast model. The new tab supplies a timeline and other data pertaining to SMSI’s recent private placement and the subsequent trading action.

Here are the key events listed:

3/5: SMSI does a private placement of $5M at $1.75 per share (the deal included warrants to buy SMSI at $2.17 per share). Total shares issued: 2.857M.

3/7: SMSI trades 2.95M shares in the three days after announcing the private placement.

3/31: SMSI short interest increases by 750,000 during the month of March.

4/16: “Short volume” and total volume begins to spike.

4/19: Shares issued in the private placement are registered with the SEC.

4/24: According to VolumeBot an additional 841,000 shares of SMSI have been shorted in April (update: 1.4M shares as of 4/26).

4/25: Short interest is only up 134,000 in the first half of Apr (versus +186K in 2nd half of Mar & +568K in 1st half of Mar) on an est’d 200,000 of short volume, per VolumeBot.

4/26: For anyone looking at “short volume” data, look at the data! It’s actually a joke. Does anyone believe that SMSI could be flat on Wednesday and up 2.6% yesterday with shorts representing 87% of all shares traded?

4/26: Over 1.7M shares trade hands between Apr 16 and Apr 26.

 

Analysis: Of the newly registered shares, only 2.86M shares were common stock. The remainder would have to be converted from 1) their Series B 10% Convertible Preferred shares and 2) outstanding warrants.

Breaking it down, most of the Series Bs are in the hands of existing shareholders whom I’ve determined to be relatively long-term in nature. They’re very familiar with the business / opportunity and not generally involved in the stock for a quick flip.

As for the warrants, those would require the warrant holders to deliver $2.17 of cash to SMSI. Thus, it’s unnecessary to convert these unless the holder plans to sell the underlying shares (which, by the way, would evaporate their significant time-value). In short, I don’t believe that we’ll see these shares hit the market anytime soon.

Accordingly, we really only need to focus on the 2.86M common shares.

 

Of those, research / discussions have led me to believe that half of those shares (1.43M) are in good hands. However, the other 1.43M shares are (or perhaps “were”) not in good hands — Hudson Bay.

In my opinion, Hudson Bay is an opportunistic firm (a.k.a. sharks). Knowing them, they bought into the round with the intent to sell the shares at something close to the deal price. This would leave them with the warrants for something close to $0 per share, plus or minus.

Based on the timeline data above, we can see that volume, short interest, and short volume have all been significantly higher since the onset of Hudson Bay’s involvement.

The good news is that the number match up favorably with Hudson Bay’s 1.43M shares.  SMSI traded 2.95M shares in the three days after announcing the private placement. Further, SMSI’s short interest has increased by about 900,000 shares since the placement.

Three days before the shares were registered with the SEC, SMSI’s volume spiked (and the stock fell). Since then, over 1.7M shares have traded hands.

Fast forward to today and we see that the increase in short interest has slowed. It was only up 134,000 in the first half of Apr (versus +186K in 2nd half of Mar & +568K in 1st half of Mar).

The registration filing clearly states that “The Selling Stockholders may also sell securities short and deliver these securities to close out their short positions”.

 

Conclusions: From all of the evidence available, I believe that Hudson Bay was primarily behind the increase in short interest leading up to the share registration. Assuming this is correct, this was simply their way of selling their shares (and keeping the cheap warrants, as described above).

Between the short-interest spike and the significant increase in trading volume, I believe that Hudson has had ample opportunity to sell all they shares they wanted.

SMSI’s chart corroborates this view:

smith

After several days of selling in early March, the shares started an uptrend that has persisted for the past month and a half. Obviously, most any uptrend occurs because there are more buyers than sellers.

In fact, I assumed that the early-March spike in volume would mark a near-term bottom for the stock and took advantage of that belief by adding greatly to my position throughout March and April.

The biggest takeaway for traders is that the March/April uptrend has come despite increased short selling (presumably Hudson Bay selling its 1.43M shares).

Now that enough volume (and short selling) has occurred for Hudson Bay to make its exit, traders have to ask themselves, “What will happen to the stock if/when that selling pressure is gone?”.

 

By coincidence, a similar report regarding selling pressure in shares of Limbaugh (LMB) was released this morning. The stock isn’t too far off of its 52-week high, but the shares are up 4% on the report. I recommend reading it because it is instructive for anyone who wants to better-understand why stocks sometime go on sale (and how to capitalize on that information).

 

I hope you’ve enjoyed this trading overview. For the fundamental risk/reward considerations please see my other articles (many listed below)… but for the purposes of this article, I believe it’s safe to say that the Hudson Bay selling is now near-complete, if not 100% complete.

I look forward to seeing if a Sprint/T-Mobile deal gets done next week.

Cheers!

 

Random Notes

* In case you didn’t know, WordPress searches are becoming an increasingly fruitful source for research on stocks. Check it out — https://wordpress.com/read/search. It’s also the easiest way to search through my (and other) blogs for research on specific companies.

* FYI, I found an advertisement for a report on the global IoT device management market. They project that the global IoT device management market will exhibit “a robust 31.5% CAGR from 2017 to 2025. The report is $5,795 so I won’t be getting it, but the leading players listed are Robert Bosch GmbH, ARM Ltd., HP, Google, Intel Corporation, IBM Corporation, Oracle Corporation, Microsoft Corporation, SAP… and Smith Micro.

 

More Research:

 

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Disclosures / Disclaimers: I am long SMSI. However, 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.

28 thoughts on “Smith Micro (SMSI) Trading Analysis: Supply/Demand In Focus

  1. Hey Mark,
    Thanks for the great analysis , as always! What are your thoughts on the T-Mobile deal? Could the drop Safe & Found if T-Mobile takes over?

    Like

  2. From the prospectus you will notice that Anson Investments and Hudson Bay account for all of the common shares that were issued. 1,428,572 for each, and the prospectus states that 2,857,144 was the amount of common issued with the offering. I suspect both sold the shares accounting for the 2+ million of shares transacted shortly after the 424b3 was issued. The other holders would need to convert either from the preferred shares or from warrants if they sold. Appreciate the analysis. Hope for smooth sailing upwards from here.

    Liked by 2 people

  3. Very nice, Mark. Thanks for sharing. You said earnings call should be within 2 weeks. That has potential to be a catalyst for more demand as well. The short percent you call BS. Do you know what causes it to get reported incorrectly?

    Like

    1. Yes, the earnings conference call should be upbeat.

      As for the short volume, who knows? But there’s no way a stock could have 87% of their total volume be short selling and have the stock come out of it +2.6%. If you told me that 87% would be short for two days, I’d tell you the stock would be down 10% at the end of those two days, easily. That’s just common sense.

      In other news, I wish we weren’t dealing with such a choppy market right now. Busy busy.

      Like

  4. Do you think if Sprint was acquired by T-Mobile it would have any effect on SMSI? Could that be a reasonable thought as to why SMSI hasn’t moved even with all the positives?

    Like

    1. Yep! I’m gathering information from my Wall Street contacts for an upcoming write up (hopefully to be released pre-open mañana).

      So far, the feeling is bullish towards SMSI, but not anytime soon. The deal has to close and there will be a lot of priorities ahead of this one.

      In the meantime, my contacts at Sprint gave me some great (bullish) SMSI info.

      Stay tuned!

      Liked by 1 person

  5. Mark, I know you addressed if Sprint got acquired by T Mobile and you said that it would be silly to transfer everyone back to Family Locator but isn’t it possible that they might give customers a choice now that they will be acquired and not sunset Family Locator.

    Like

    1. No. Sprint is still Sprint until this deal closes and it’s going to be business as usual until then (likely a year).

      Also, I received an update on the sunsetting process, which I will reveal in my next post. Stay tuned!

      Like

  6. Doesn’t DT and SMSI already do business in Europe? If this product works well for Sprint, I think the sky is the limit. A delay in the beginning may be beneficial in the end. Get a great product right the first launch and DT will come on board in 12-18 months. A long wait but would be well worth it if we get both carriers with SMSI!!!

    Liked by 2 people

    1. Definitely a viable scenario…. and they wouldn’t necessarily need to wait for the deal to close.

      From what I’ve gathered, SMSI is focusing on Sprint to perfect the process of on-ramping a major carrier (it’s a LOT harder than you might think — which is why they were able to buy the app developer on the cheap).

      Once that’s done, they will be able to redeploy and expand their resources to ramp up other (and more) carriers.

      That could happen soon, because I’ve found out that Sprint is in the final stages (finally!) of moving their base from Location Labs to SMSI.

      Like

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