GSAT Is Raised to a BUY
New Chardan has GSAT)+to+Buy/12589155.html” target=”_blank” rel=”nofollow”>raised Globalstar (GSAT) to a Buy with a $2.50 Price Target. In the upgrade note, they said, “We are raising our recommendation on Globalstar to Buy with a $2.50 price target. The price target assumes a constellation valuation of 7.5x EBITDA, or $200 million and values the US terrestrial spectrum at $1.00/MHz-POP. We are placing no value on the company’s international spectrum that could be re-allocated for terrestrial usage, but obviously this would drive valuation much higher.”
I still like the idea of writing the July 1.50 calls at these levels.
RADCOM Still A Buy
Aerohive Looking Good Again
We made good money on Aerohive (NYSE:HIVE) the first time around. Things aren’t perfect there, but if it was, there wouldn’t be much profit to be had in the stock. Unbeknownst to most, ARRIS (NASDAQ:ARRS) and Broadcom (NASDAQ:AVGO) have agreed for ARRIS to acquire Brocade’s Ruckus Wireless and ICX Switch business for $800M cash, plus the additional cost of unvested employee stock awards, following the closing of Broadcom´s acquisition of Brocade.
In my opinion, this is a good outcome for Aerohive . If Ruckus had gone to Dell (NASDAQ:DELL), for example, it would have been very bad for HIVE. So, this takes a cloud of uncertainty away, which should be good for the stock, which is sitting at my risk/reward low.
Regardless of what the stock or the bears will tell you, it was another very nice quarter for MATR.
Speaking of the bears, I like devil’s advocacy, but I have no respect for people can’t see the good in anything. That’s called confirmation bias. When you encounter someone who can’t acknowledge a balanced view, they are not to be trusted (because they cannot even trust themselves).
Keep in mind, I’ve been generally bullish (wrong so far), but have NOT been easy on these guys — in other words, “balanced”. In contrast, many bears are relying on hunches… and possibly getting the attention of yours truly to get some PR. If so, that’s just petty. No matter how it’s disguised, trolling is still trolling… and trolls are to be pitied.
As for MATR, I’ve presided over countless software M&A valuation assessments in my 20+ years. This is important because MATR’s acquisition value is perhaps its greatest hidden value. Indeed, MATR’s valuation is conducive to a highly accretive transaction, due to the operational synergies relative to larger vendors with established global sales and marketing organizations.
Specifically, I see $3-4M of quarterly opex that would likely overlap with a larger company. And let’s not forget the $500-800K of quarterly interest expense that would disappear as a result of the acquirer’s much lower cost of capital. Then, add some modest synergies in capex and account for the NOLs.
The result: MATR would generate $16M in FCF for an acquirer with NO improvement in execution. Give that a 10% yield (leaving plenty of room for the acquirer’s shareholders to gain 50-100% on the transaction — see ORCL’s FCF yield for one example of reference) and you have a $6 buyout share price.
Of course, a company like ORCL would greatly improve MATR’s execution/penetration. I’ve seen it countless times before. Raised prices and vastly more salespeople can double the gross profit line, adding about $20M of FCF upside potential to my calculation, more than doubling the POTENTIAL value to an acquirer to nearly $20 (using a 7% FCF yield).
Of course, the key word is “potential”… the ultimate scenario for an acquirer. What discount do they apply to that potential? I think paying $6 is a no-brainer (i.e. bare minimum) for an entity that would deliver $9-12 of value to the acquirer. If more than one company took interest (I believe that any call center focused software vendor would), I believe the $9 number would easily apply.
Of course, MATR would have to get their stock up to $6 organically to enable a $9 acquisition price to fly, so their execution in 2017 will be the key. If Q3 and Q4 are any indication, they’re (finally) on the right track.
This is why I was a net-buyer all week, adding tens of thousands of shares into my IRA account.
Of course, on Friday, they announced a financing. Investors paid just $3, well below the recent $4 price level. However, management paid $3.45, which is roughly what I’ve been paying lately.
To be fair, management’s participation DOESN’T protect the price (if it did, everyone would be a millionaire). In fact, if management knew then what they know now, they would have raised more money last time and not participated at $6+ as they did.
So why did they mug themselves by participating? Easy — they (justifiably) loved the product, but overestimated their ability to sell it effectively and set reasonable expectations to investors.
A company’s valuation is ultimately based on performance and expectations as they aim to sell their product into the marketplace… and MATR has not performed consistently until recently.
Now, IF that momentum continues, the stock should be markedly higher in the months ahead. That’s an important IF, but very doable. They already have customers paying 7- and 8-figures a year just to USE their routing product. That proves that the PRODUCT is good. The problem is that the COMPANY has done a poor job of selling it.
That being said, the company has been growing and adding to its subscription base. That base is important. Investors often make the big mistake of thinking that an unprofitable company’s STOCK is overvalued, when the reverse is often true.
The key is in understanding what they are investing in. You can’t judge a company’s investments without understanding the payback. Companies like AMZN and CRM proved this. But those companies had a ton of bears all the way up, despite doing a great job of executing.
The problem is that the bears had no understanding of what those companies were building. They didn’t see “investments”. They saw “losses”. The difference is incredibly great. Just look at a 10+ year chart of AMZN and CRM and imagine that one person shorted them with 100% of their money and another person bought them with 100% of their money. You can do the math.
I am not (not, not, not) trying to compare MATR to AMZN or CRM. Rather, I mention AMZN and CRM as examples of the fact that losses aren’t always losses. If you look at MATR’s operating model, you will see that SG&A isn’t an onerous piece of the equation. In other words, the millions of dollars that they receive every year from their customers are quite profitable.
Of course, MATR needs to spend a good amount of $$ to get to that point with each account. However, we can’t stop there. We have to quantify it against the longer-term cash flow that results from each engagement.
In the case of MATR (and any other SaaS company), you need to consult a software veteran (I’ve done this work.) who knows how these businesses work and what the investments will reap, regardless of the losses ( while not ignoring the losses).
Opinions aren’t worth much if they are built without the benefit of expertise.
To be clear, MATR’s stock has not suffered from a lack of company growth. Again, the company has grown. However, 1) its former valuation required better execution to justify that valuation and 2) investors justifiably don’t trust the stock because management has done a poor job of setting achievable EXPECTATIONS.
The key words there are “PRODUCT”, “COMPANY”, “EXPECTATIONS” and “STOCK”. They often move together, but are actually mutually exclusive entities. A good product requires a good company, setting good expectations to make for a good stock.
Before I started covering MATR (pre-routing) they had NONE of these four things (because they had a “mediocre” product being sold by a poor company which set poor expectations). This resulted in a poorly performing stock.
I started covering MATR when they developed routing. Routing is good — very good. That gave them one of the three attributes needed to have a good STOCK. Unfortunately, until recently, they’ve only been an “ok” COMPANY (they’ve grown revenue) with a bad reputation for setting good EXPECTATIONS. That’s why the stock has been a poor performer.
But now, the COMPANY is showing more growth and has a stronger management team than before. The new CFO is very good, freeing the rest of management to do what they do best (and stay away from things they don’t do so well). Meanwhile, EXPECTATIONS are being set better, as evidenced by the last two quarters’ results.
The STOCK hasn’t followed yet because investors don’t know, acknowledge, or believe it.
That is also justified (for now). MATR needs to continue proving itself.
Today’s offering also hurt the stock, but it hurt the stock before today. Offerings typically hurt a stock before the deal is announced because the deal has to get shopped to investors (mostly institutional ones) to see who’s interested in participating. I’ve gone through this process. They make you “promise” you won’t tell anyone or act on the information.
Good luck with that.
At the very least, someone who was going to buy the stock will simple buy shares via the offering. That changes the balance of supply and demand, which is very different than valuation. Supply and demand should be monitored and taken advantage of — this is how you get stocks at bargain valuations. Remember RDCM last May?
This is how Wall Street works.
I’m not saying that MATR has turned the corner, but anyone who denies that the product is good and that the company and expectations are getting better is either a troll or blind.
I can’t afford to be blindly bullish or bearish. My net worth depends on the truth.
Objectively speaking, there’s still work to be done, but things look a lot better there than they did 6 months ago… and yet the stock is cheaper. That’s what made me a buyer this week. I continue to like MATR’s risk/reward profile and will take gains or losses in stride. It’s just another piece in my portfolio. Some win, some lose. This is the approach that enabled me to retire at 38.
To be sure, I jumped on this one too early, but momentum finally seems to be building. Time will tell. In the meantime, we’re seeing nice progress. Also, the company was just granted its third patent of the year. This latest patent involves the methods, apparatus, and systems to “analyze mono-recorded customer-agent communications to apply distress analysis techniques to identify one or more distress events. The methods include recording a mono recording of a communication between an agent and a customer, separately recording the agent voice data in an agent recording, subtracting agent voice data from the mono recording using the agent recording to provide a separated recording including only customer voice data, convening at least the customer voice data to text, and applying distress analysis to a portion of the communication to identify one or more distress events.”
The detailed description includes the following passage: People with different personality types “may be motivated differently, may communicate differently, and may have a different sequence of negative behaviors in which they engage under certain circumstances, e.g., when they are in distress. Importantly, each personality type may respond positively or negatively to communications that include tones or messages commonly associated with another of the personality types. Thus, an understanding of a user’s personality type typically offers guidance as to how the user will react or respond to different situations.”
In other words, MATR continues to hone its craft. In the meantime, the company is making further strides toward consistent execution…
…and not for nothing, but the stock reacted to the news of a $3 financing by going up 3% to $3.55 on a day when the market was down. The bears will try to explain that away too, so be ready for it.
Sign of Things to Come?
This is not the kind of news we should be seeing with the Dow making 9 straight all-time highs this month… Boston, NY Tech Job Growth Hits 5-Year Low
I’ve been cautious for a couple months, which hasn’t seemed like the right thing to do. However, I know two things: 1) being cautious doesn’t always pay off, but 2) nobody loses big chunks of their money being cautious. I remain cautious and continue to believe that we’ll get a chance to buy stocks for a lower price than we saw when I issued my Yellow Alert.
My prior four Alerts were right, so I’ll accept a loss if it comes. Time will tell. In the meantime, I continue to buy cheap stocks and short the indexes like the Russell 2000 (NYSEARCA:IWM) as a hedge.
The information in this article is for informational and illustrative purposes only and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action. The opinions expressed in Pipeline Data, LLC publications are the opinions of Mr. Gomes as of the date of publication, and are subject to change without notice and may not be updated.
All investments carry the risk of loss and the investment strategies discussed by Mr. Gomes entail a high level of risk. Any person considering an investment should perform their own research and consult with an investment professional. Additional important disclosures can be found in the Important Disclosures section at PipelineDataLLC.com.