First of all, I want to thank everyone for your kind messages and emails. I always appreciate the kudos and feedback.
As a reminder to those who have emailed questions and stock ideas to me – please understand that it’s exceedingly difficult to keep up with the multitude (about 200 per day) emails that hit my desk. I do open them all (at least briefly) and will read well-researched ideas, but time doesn’t permit me to respond to the vast majority.
In other words, please take no offense if I don’t respond. Thanks again and thank you for understanding.
Quick Recap Of My LIVE YouTube Session
Yesterday, I hosted a LIVE info and Q&A session on YouTube. About 100 people tuned in live and a couple hundred more have checked out the replay. I won’t always recap the content (perhaps one of you can volunteer to do that!), but considering the big market decline, here are my quick notes:
1. Rising rates and trade wars aren’t good for the economy (at least not in the short-term). It creates disruptions, stifles investment, and transfers money (in the form of tariffs) from companies to the federal governments.
That being said, the economy is still strong, so I expect the market decline to occur in a more orderly fashion. In other words, if the market is heading for a more meaningful correction, I expect it to bounce at some point along the way. I think there will be better opportunities to sell ahead.
As a result, I started to increase my long exposure at the end of the day today.
2. Nobody knows where the market is going tomorrow… but I like my stocks. So, why should I get rid of them? Trimming positions and getting rid of speculative names is a good idea in this market, but if SMSI executes, they could do $0.50 of EPS in 2019 (model here). That’s a P/E of less than 4 as compared to its enterprise value of $1.90. Even in a bear market, stocks don’t get to half of those levels.
Clearly, when fearful of a market decline, it makes more sense to sell what you don’t feel great about, but I focus most of my attention on shorting the source of my fears!
In this case, I’ve been short things like FXI (China) and long things like RWM (which shorts the Russell 2000). I’ve also been short assorted stocks that I believe will have troubles ahead (like Kroger $KR, which is facing major competition from Amazon $AMZN).
3. I expressed my view that demand for Turtle Beach’s $HEAR products still looked good to me (per NPD data). That was quickly proven correct. HEAR pre-announced a very strong quarter. The stock responded by ripping despite the market being down heavily today.
This was a perfect example of why its good to own companies with business momentum, even in a market decline. My RWM made money and my HEAR bet made money, so I’ve been having a great week, despite the market decline!
4. This is not an environment for speculative picks. If the business isn’t already humming, the stock is liable to get hit harder if the market continues to fall. I have decades of experience with this, dating back to the Y2K and Internet bubbles.
A few years ago, I said that 48 of 50 pott stocks were shorts. On average, they dropped 95%. At the beginning of the year, I effectively called the top on Bitcoin and crypto stocks like $RIOT. Since then, Bitcoin has gone from $16,000 to $6,000 (and RIOT has gone from 25 to 2). Ditto for MoviePass $HMNY.
At present, I feel the same way about the new run in pott stocks. Most of the pott stocks are speculative… and most of the others are overvalued. There’s money to be made here, but it won’t be easy. Can the bubble continue to inflate? OF COURSE… but I wouldn’t want to be there when it pops. I’ve been making my money on the short side (by shorting call options on stocks like $TLRY and $NBEV). In the meantime, I protected those negative bets by making a short-term bullish bet on XXII, which also paid off. Win win!
5. Speaking of companies with momentum, I provided a major update on SMSI by recapping their latest investor presentation, which sounded very bullish to me. Here are my notes from the presentation:
Notes On Smith Micro’s (SMSI) Latest Investor Presentation
EMPLOYEES — SMSI currently has 160 employees. Most of them are in European development centers. Two takeaways: 1) SMSI’s expense base has been consolidated around product-development and 2) having moved development efforts overseas, SMSI is now benefiting from lower wages and a strong dollar.
SAFEPATH / SAFE & FOUND — The new IoT edition of SafePath (which is also known as “Safe & Found” at Sprint) will monitor items in and out of the home — this will include many home monitoring devices, along with vehicle trackers, pet trackers, and elderly trackers. Customers want this from their carriers. As a result, SMSI believes that the IoT edition will result in new carrier wins.
Roughly 50% of Sprint’s Safe & Found customers are new buyers, as opposed to converted Location Labs customers. All indications are that Sprint and SMSI are targeting 2-3M subscribers over time. That’s in the Sprint customer base alone, making this a much bigger opportunity than the Location Labs customer base (which I estimate at 300,000).
Sprint and SMSI won’t discuss this publicly, but triangulation of data points from multiple reliable sources indicate that a SMSI receives about $10 per quarter per subscriber. From there, the math is easy to do. I believe they averaged more than 100,000 customers during the quarter and ended the quarter with 120,000 and 140,000. This is a nice growing base of high-margin subscription revenue.
Now that Sprint is successfully running on auto-pilot, SMSI finally has the bandwidth, ability, and market credibility to focus on attracting new carrier customers. SMSI favors those with an installed base of customers using inferior products.
Smith Micro’s CFO, Tim Huffmyer (who is traditionally conservative) specifically said that its SafePath IoT opportunities are not reflected in SMSI market cap.
COMMSUITE — CommSuite is pre-loaded on all Android devices at Sprint. They have an iOS version which has not been rolled out yet. CommSuite currently sits on 19M devices and manages over one billion messages per quarter. SMSI is investing in maintaining and expanding this product’s relevance.
SMSI is optimistic that another U.S. carrier will “seek out” CommSuite in the near future, due in part to enhancements made over the past year. Expect 3% sequential growth per quarter for the rest of the year (very healthy for a long-established product).
In the meantime, multiple years are left on the Sprint contract. So, The odds of losing Sprint are virtually nil, while the odds of winning a new carrier is substantial.
T-MOBILE — SMSI has publicly noted that T-Mobile has a few SafePath-complementary offerings AND an inferior voice platform to CommSuite (which also happens to be an internal cost center). Connecting the dots, it seems quite clear that they are in advanced discussions with T-Mobile, among others.
GRAPHICS — New launches are coming to the Graphics biz, which should start to contribute to a resurgence in this business, which has recently been a drag on overall revenues.
QUICKLINK IOT — The QuickLink IoT business is for sale. Don’t be surprised if they divest this business by selling multiple unlimited perpetual licenses and the selling the rights to the rest of the business to an independent third party.
NETWISE — NetWise is a policy-based Wifi-offload product which has data analytics for spectrum and non-spectrum, which provides great insight into customer activity as they jump from network to network.
QuickLink & NetWise had one-time license sales in Q2 (about $200-250K). These aren’t expected to repeat in Q3, but data points and math suggest that SMSI should easily replace that revenue with growth in SafePath and CommSuite. As a result, I personally believe that they will blow away the Street estimates of 6.1 million in revenue for the quarter.
EXPENSES — Costs dropping by another $250K/Q. Seeking more opportunities to reduce expenses.
CONCLUSIONS — Tim Huffmyer said Sprint it will become a bigger % of SMSI revenue as SafePath ramps up… but then he said that it will “decrease when (he didn’t say “if”) they launch on another SafePath customer”. this provides further evidence that the company is close to signing a new major carrier.
Mathematically, it HAS TO be something that will grow faster than Sprint is, but Mr. Huffmyer’s rhetoric also makes it clear that They are seeking customers with an existing install base, which means that he’s talking about AT&T, Verizon, and/or T-Mobile (any of which could justify the addition of multiples to SMSI’s valuation).
Connecting the dots of Tim Huffmyer’s rhetoric, it seems pretty clear that they are hoping, if not expecting, to win T-Mobile. If they do, barring a massive gap up on the announcement, I will be buying shares on that news.
POSITIVE EARNINGS ON DECK — Q3 earnings will be announced soon. In general, I don’t make earnings calls unless I’m confident about the likely outcome. In this case, I’m VERY confident that SMSI will easily beat the Street estimate, which calls for $6.1 million in revenue. I expect something closer to $6.7 million and perhaps as much as $7.0 million (which would obviously be outstanding).
I think it will be a good sign if SMSI announces its call date soon. On average, the call has been scheduled for the final days of October. If it’s anywhere in that ballpark, it will only add to my confidence in the outcome.
- 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, HEAR, RWM, and short FXI. I’m also short HEAR put options and NBEV call options. However, this content 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.