SMSI Special Report: Part III

Opening Disclosure — 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 and context 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.

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FYI, I’LL BE HOSTING MY NEXT STOCK RESEARCH & INVESTING LIVE Q&A ON WEDNESDAY (TODAY) AT 1PM ET.

I’LL BE TAKING ALL QUESTIONS ON ANY TOPIC OR STOCK I KNOW ABOUT. DON’T MISS IT!

 

SMSI SPECIAL REPORT: Safe & Found Reads Into Sprint’s Retail Channel

PART III – STRATEGIC IMPLICATIONS

I ended Part II of this report series by saying that we experienced a fairly even split of 54% bullish/unbelievable to 46% terrible/OK reads. The best takeaway is that the stores that are making an effort are doing great, on average. I strongly believe that this data is making its way through Sprint. As they start to understand the ramifications, I believe they will redouble their already-formidable plan of action.

After reviewing the data and all other recent events (including new & existing products being offered by the competition), the math tells me I need to raise my 2019 and 2020 revenue and earnings forecasts.

Specifically, I now believe SMSI can achieve $51M in revenue and 51-cents of EPS in 2019.

For 2020, I believe they can deliver $65M in revenue and EPS of 88-cents.

FYI, you’re going to see much larger numbers below. However, I prefer to take my official numbers up more gradually, to allow plenty of room for error.

Of course, if they come anywhere close to these numbers, we’re all going to be very happy investors.

As it stands, SMSI is nearing profitability and has about $12 million (50-cents per share) in cash.

By my reckoning, if things don’t work out, the company should still trade for 1x revenue plus cash, which works out to about $1.50 per share. Conversely, you can envision what the stock will do if they hit my estimates… and those numbers do not account for winning any new business!

Needless to say, the risk/reward profile is quite compelling.

FYI, short interest is now declining and the stock has been in a pennant formation for a few weeks. It looks ready to break out of that formation to the upside.

SMSI Chart

Keep in mind, this is part of a strategic initiative on Sprint’s (and other carriers’) part to stem their customer churn rate (which currently stands at about 1.7% of customers per MONTH) and attract more families (which don’t churn as much as individuals). According to the anecdotal feedback we collected, it appears that Safe & Found does more than that — it actually HELPS ASSOCIATES TO WIN NEW ACCOUNTS!

If/as word of this spreads, stores should become much more eager to introduce potential customers to Safe & Found, in order to bolster their overall customer sign-up rate. If that happens, things could get really crazy.

Crazy as it would be though, it would not be outlandish relative to the data points I collected from other CEOs at the LD Micro Conference who sell applications into the carrier ecosystem. If you don’t recall what I said about that a few days ago, they viewed 15% attach rate as a minimum bar for a moderately successful application and 50% as quite doable for good ones.

At the lower end of that scale, and accounting for the percentage of customers that are likely families (based on overall U.S. demographic data), that would give Safe & Found 2.4 million Sprint subscribers over time.

The interesting thing about that number is that my due diligence has uncovered that Sprint’s initial plan/expectation is to sign about 2 or 3 million customers.

That would be a reasonable expectation, assuming that Safe & Found achieved a modest level of success. However, our data is showing something much stronger than that, suggesting the potential for upwards of 8 million subscribers over time…

… and that doesn’t account for the fact that Safe & Found will appeal to a much broader audience next year, when it introduces Internet-of-Things (IoT) devices (see my past posts for details on this upcoming development).

This will be just the latest in a series of innovations designed to keep SMSI ahead of the technology and feature curve.

This is one of the things I like best about SMSI. Getting lazy is what got Locations Labs kicked out of Sprint. Their app was too dependent on its Location capabilities, something that has been commoditized to the point where consumers can get competitive offerings for free. This allowed SMSI to swoop in with Parental Controls and Website White/Blacklisting to win Sprint’s business.

In addition to this, Safe & Found has a robust product roadmap, designed to keep its SafePath business one step ahead of the competition.

Speaking of which, I’ve investigated Apple and Google’s new Parental Control features and there are several thing to note:

 

  1. The offerings are nice additions to their respective operating systems. However, both are lacking in terms of functionality, integration (providing Location, Alerts, Controls, and Website Monitoring all in one app), and cross-platform support (Apple’s solution doesn’t work if your kid / elderly parent has an Android phone and vice versa).

    Individually, each of those factors would be enough to remain confident of SMSI’s future. However, the combination of factors illustrates why SafePath is here to stay for the foreseeable future.

 

  1. The commoditization of features will always be prevalent in the tech sector. There’s often something cheaper, but that doesn’t make it the same or easier.

    iOS and Android have both been incorporating family-safety features for a long time. However, but the lack of cross-platform integration, functional integration, and uniformity are problematic. They provide different benefit, are designed differently, and in some cases require additional apps to complement the core functionality.

    In contrast, customers that learn Safe & Found never have to worry about which app to open (regardless of operating system) to deal with a specific feature. As an application analyst, I witnessed the power of this on innumerable occasions.

    History has shown us that integrated applications almost always win out (Microsoft Office, SAP R/3, etc). You can even see this with companies like GAIA, which offer videos similar to those we can watch for free on YouTube. The difference is that GAIA makes it easy for people to easily find everything they want in one place.

 

In short, people (and especially Moms) don’t want to deal with technology, complexity, and multiple applications.

They’ll gladly pay a few dollars a month to avoid it… and our survey results bear that out. This is something to keep in mind as you review new and competing products in the marketplace.

Of course, there are certain types of people who won’t ever buy Safe & Found (for example, tech-savvy and/or low-income parents). However, with over 80M million families in the U.S., just 1% penetration will produce 80-cents of recurring Cloud/SaaS-based EPS for SMSI.

So clearly, we don’t need the aforementioned 8 million subscribers to hit a grand slam on this investment.

Based on Management’s operating margin guidance, SMSI will generate about $1 of annual EPS for each million subscribers Safe & Found attracts. At the aspirational 8 million subscriber level, they would be generating well over $8 of EPS, surely sending the stock back over $65 per share (something it has achieved on 4 separate occasions over the past 22 years).

Of course, we’re talking about maximum penetration levels here… so I’m certainly not implying that the stock should go to $65. However, it’s been there before and I’ve witnessed beaten down software companies turn into hundred baggers before (Concur, which was acquired by SAP, comes to mind).

Further, one software CEO at LD Micro indicated that his product was able to achieve 50% penetration at a 10 million subscriber carrier in about three years.

In other words, a run like that would be neither unprecedented nor a complete shock.

Nonetheless, let’s rein the excitement back to present-day reality. Suffice it to say that the rollout is going much better than I expected when I projected earnings of 50-cents per share for 2019.

More in Part IV…coming tomorrow morning!

FYI, I’LL BE DISCUSSING MORE SMSI FINDINGS, INCLUDING NEW (NON-SPECIAL REPORT) INFO IN MY NEXT STOCK RESEARCH & INVESTING LIVE Q&A

WEDNESDAY AT 1PM ET. DON’T MISS IT !

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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.

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25 thoughts on “SMSI Special Report: Part III

  1. Hi Mark,

    Loving the in-depth analysis. One thing that peaks my curiosity for now (concern is too strong of a word just yet) is why the stock is not moving up, and why it is even a bit suppressed since the recent move up. I have no doubt there were plenty of fast players involved in the offerings, nonetheless these supposedly smart/sophisitcated investors are surely aware that the company is on the verge of reporting a 50% + increase in revenues, practically overnight, and the commensurate EPS growth that comes with it. So the question I am asking myself these days is why the market is suppressing a stock that should be trading at $4-$6 depending on the valuation method used, based upon reasonably extrapolated facts?

    Like

    1. “these supposedly smart/sophisitcated investors “ Who???? 😂😂😂

      Most of the people involved right now either have there full position or are daytraders.

      Meanwhile, the stock had clearly in a pendant/flag (consolidation) formation, shaking out nervous investors, etc. Skeptics are contributing FUD to that dynamic.

      Traders will keep it there until it reaches the head. Then we’ll see what happens 😊 I said this yesterday… #patience

      Liked by 2 people

      1. The shame is that the July options probably expire ~ 1 week before the earnings report, based upon previous Q2 releases. The August options could move nicely IF they announce a Location Labs rollover number or guidance based upon a successful transition.

        Like

    1. I have been buying the Jan $1 calls. Assuming something doesn’t go terribly wrong, one can pay 1.45 for a 2.35 stock. The Delta is near 1, so the options will track the stock up (we hope) 1/1.

      Like

      1. Keith – I think you mean you will be able to pay $1 for the stock then, while paying a premium of 1.45 now per option? Effectively, you will be able to get the stocks for the same price in January as they are now ~ around the $2.40 mark.

        Just wanted to clear up any confusion because you are paying 1.45 for the option, but will still need to pay 1 dollar per share as per the strike price of the call option.

        Also – I wish I was able to sell naked puts, but alas since I am trading through my TFSA (I’m Canadian) I am unable to open a short position even if I have the funds to cover the short later on.

        Like

        1. Hi Yushen,

          What I mean is the Jan $1 calls will get the same price movement as the underlying (b/c the call is DITM, the Delta is almost 1. So in reality, one can purchase 1000 shares for $1,450 instead of $2,300. The caveat is upside needs to happen before Jan expiry (IMO if it doesn’t, something went drastically wrong the next 6 months).

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          1. Keith,

            I understand you’re saying that the call option basically allow you to own an equivalent of 1000 shares worth of stock for a $1450 valuation instead of $2300, but you’re not “purchasing 1000 shares” for $1450; you’re purchasing the right to purchase 1000 shares at $1 for a price of $145 per 100 shares.

            Just think that distinction needs to be made so no one goes out and buys call contracts thinking they’re getting a huge discount on the stock.

            As well, on the contrary Keith – if you were selling these contracts for 1.45 you could effectively be making a quick profit by selling these contracts and purchasing the stock at current price. If you were to sell each $1 January call at 1.45, you could purchase the stock at market price at ~ 2.33 currently. This means that effectively you paid $.88 per share, you will be selling the stock later for $1.00 – making this a $.12 gain per share!

            There is literally no downside to the above strategy, other than the emotional pain one would suffer seeing the stock rise higher while having to hold the stock knowing that it might be called away from them at any moment LOL.

            Like

          2. Yushen, fair enough on the distinction, we don’t want to confuse any newbies.

            As far as the strategy you suggested, it isn’t a terribly high-yielding strategy. 15% gain for 1/2 year, or 30% annualized. With no upside. One can just sell the Jan 2.50 put for .80, which is 60% annualized, but if January rolls around and the stock hasn’t moved up to make the puts worthless….then something is amiss, especially after 2 quarterly conf calls.

            Like

  2. “In other words, a run like that would be neither unprecedented nor a complete shock.”

    I agree on the unprecedented part but if it happens I’ll try hard to play it cool and not be shocked 🙂

    Liked by 1 person

  3. If that type of run does happen we’d all become millionaires — or rather not because we’d prob sell off way to early! Always happens to me, even with HMNY’s first run up.

    If this stock hits anything above $20 — majority of people who have bought under $2 will have sold.

    Like

  4. Mark, I was looking to sell October 2.5 puts But know that they are really thinly traded. What happens if the stock goes up and I want to close out the position early because of the gain but there was no one to buy back my puts. I imagine this would force me to hold the puts until expiration but that is something I would not want to do so have not sold the puts.
    Could you please comment on this. Thanks

    Like

  5. thanks for tracking down whether people are being allowed back on FamilyLocator. I saw that review and would have never thought that someone would fabricate a review and then point to the review as proof for their bear argument.
    Well played, Mr. Trader. lol.

    Like

  6. Ups & downs in the Russell Microcap Index impact ETFs like $IWC (not $IWM), which will now impact $SMSI.

    This will present opportunities. When $IWC is down (yesterday it was down nearly 2%), it will pull $SMSI with it.

    But that’s blind selling, which we can take advantage of. So, I like long $SMSI and short $IWC for anyone who likes $SMSI but afraid the market might drop some more.

    Could profit on both. 😎

    Liked by 1 person

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