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SMSI SPECIAL REPORT: Safe & Found Reads Into Sprint’s Retail Channel
PART IV – WHAT COULD THIS MEAN FOR THE STOCK?
I ended Part III of this series by saying that the rollout is going much better than I expected.
In my opinion, something catastrophic would have to happen to the Safe & Found story for us to lose ANY money on SMSI from these levels (especially with the fantastic financial controls that “new” — 1 year this month — CFO Tim Huffmyer has been putting into place).
I’m sure I’ve already discussed these measures, but to quickly recap:
- Moving expenses to cheaper geographies (particularly engineering resources). If a developer in the area of SMSI’s headquarters costs $175K, the same one in Pennsylvania costs something closer to $130K… and in Europe can be as cheap as $35K. Of course, iMobileMagic (SafePath’s developer) was founded in Portugal.
- Divestiture of non-strategic / non-profitable product lines and development projects.
- The use of metrics (i.e. the Rule of 40).
With better cost controls in place, I feel that Mr. Huffmyer might be able to make SMSI’s non-SafePath businesses profitable. If correct, our downside risk is shrinking with each initiative he institutes.
In my opinion, the downside risk is 1x revenue, plus SMSI’s net cash balance (which is about 50-cent per share). That adds up to $1.50 per share if things go wrong.
On the flip side, based on my calculations, I just raised my EPS estimates to 51-cents for next year and 85-cents for 2020 (with room for upside). If that proves accurate, SMSI should end next year with $1.00 of cash on the balance sheet, which should be added to whatever P/E multiple you wish to apply to the $0.85 EPS estimate.
Pick your number.
OK, let’s move on to other aspects of our data set.
Anecdotal feedback from experienced employees indicated that the results of our survey will only improve over the coming six months (which was said to be the critical time frame during which the success or failure of an application is determined).
This meshes well with the separate data points I have collected, which suggest that the company has been rolling out the product methodically and plans to institute incentives/metrics once the 4,000 stores are substantially onboarded.
From what we are seeing so far, it is clear that Safe & Found fits in the “success” bucket.
Other factors to consider include:
1) Sprint adding 500+ new stores this year.
2) The merger with T-Mobile being viewed by SMSI management as bullish (winning T-Mobile U.S. would likely triple the size of the account in short order, while increasing its overall opportunity by 150%).
3) Our data only covers Sprint’s retail stores. It doesn’t account for the online channel, where many stores (and AAA) are driving customers.
4) Not all customers are going to keep the product beyond their 30 day free trial. That being said, the feedback from customers has been fantastic. This stands in contrast to the online reviews, which have been less-stellar.
As I have discussed before, there are several reasons why the reviews skewed to the negative early on (and continue, to skew negative to some extent):
- Alleged tempering. Multiple individuals have noted suspicious review, including timestamps and geographic footprints, which suggest that a number of negative reviews have originated from outside of the U.S. (where Safe & Found isn’t even offered).
The prevailing belief is that Location Labs has been planting these reviews in hopes of sabotaging the Safe & Found rollout.
In fact, one of the reviews even stated that Sprint is allowing customers who are unhappy with Safe & Found to switch back to Location Labs. Those who traded on this information without confirming it will be disheartened to learn that the information is false.
I have many contacts in strategic positions and this rumor was categorically rebuffed. I’ll provide an additional data point in my next installment of this report.
- People Don’t Like Change. Sprint customers of the sunsetting Location Labs product are being forced to download, install, configure, and learn a new product.
Regardless of how good the product is, I wouldn’t be happy either. I’ve experienced this first-hand with Apple products, where I was miffed at a forced change, but very happy once acclimated to the product.
- Squeaky Wheel Syndrome. Online app reviews are generally dominated by 5-star and 1-star ratings. In other words, most people don’t leave reviews unless they are wowed or disgruntled.
This was exemplified by the fact that 5- and 1-star reviews dominate the Safe & Found ratings page. However, despite this, both represent less than 0.3% (1 in 300) of estimated downloads. In other words, almost nobody is leaving a review.
It should be noted that the reviews have improved markedly over the past month or so (see the Review Data tab of my SMSI Profit Model). The average review was 2.15 before April, 2.38 in early April, 2.89 in late April, 2.99 in May, 3.18 month-to-date (June), and 3.48 since June 6.
For the record, as someone who has personally tested the product with multiple families, I still don’t believe that the reviews are anywhere near reflective of reality (due to continued manipulation and squeaky-wheel dynamics).
To be clear, our channel-checks (and my personal experience with multiple families) suggest that Safe & Found is closer to a five-star product than a three-star product.
Incidentally, even though the number of 1-star reviews has been in decline (2.8 per day in April, 1.6 per day in May, 1.4 per day in June, and just 1.1 since June 6), the total number of reviews has been rising. These factors point to an increase in the number of Safe & Found downloads.
This is validated by the fact that Safe & Found moved up the download rankings in late May and have remained stable at those higher levels. This should produce an upbeat Q2 earnings report.
I think downloads will remain in this range until the Sprint Stores are fully ramped up (about a month from now, based on their current pace). Thus, I expect to see a spike around the beginning on August, leading to an even stronger Q3 for SMSI.
I suspect they will talk about that on the Q2 call in a few weeks (and you can bet I’ll be asking them about it!).
Looking at the trading action, short interest has been on the decline and the stock has been in a pennant formation for a few weeks (just taking a breather after the big LD Micro Conference run up).
It looks ready to break out of that formation to the upside:
OK, that’s it for today. We’ll review my conclusions in Part V tomorrow!
- The Quick Investor’s Guide To SMSI
- Tracking Sprint’s Safe & Found Roll-Out On Twitter
- Videocast: AEHR 10-Q, MoviePass Update
- Does SMSI Stand For “Smart Money Speeding In”?
- MoviePass Projected To Burn $600M In 2018
- Sprint Finally Rolling Out SMSI’s Safe & Found Nationwide!
- AEHR Grows 175% — Beats On The Top & Bottom Line (Buying More)
- SMSI 10-Q Released — Strategies For Trading The Stock
- Lose 33% In 9 Months To Make 1,000% In 15?
- GAIA vs. MoviePass: CAC Shows Which One Is A True Mini-NFLX
- Buying SMSI — Today Is The Day I’ve Been Waiting For!
- SMSI: Riding A New Trend & Making Its Latest Comeback
- Mark Gomes 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.