Archive for May, 2011
Vertro Update – Many of our members took the opportunity to take profits in Vertro back in February as a number of factors (discussed here) led us to temper our optimistic outlook. Given management commentary on the last quarterly conference call and that they did not release non financial metrics for Q1, we are again feeling that the numbers may be less than inspiring and while we think the stock is cheap based on its long term potential, we think subpar Q1 numbers could expose shareholders to further downside risk in the shares in the absence of some other positive catalyst. Having said that, we do recognize that there are a number of positive catalysts that could cause a rally in the shares (accretive acquisition, insider purchases, company buying back stock, etc.) and note that its relatively cheap valuation still makes it attractive in many respects (particularly as an acquisition target) irrespective of any near term softness in its reported numbers.
Atrinsic Update – Atrinsic’s stock price has fallen due to heavy attention by short sellers and a general “buyer’s strike” that is understandable given the lack of information provided to shareholders that would allow them to determine several key items:
1) how the company’s Atrinsic Interactive division turnaround is progressing
2) If Kazaa has been able to grow its subscriber base in spite of capital restraints
3) If the company raises capital at this juncture, will it be mostly equity, mostly debt, debt and warrants?
4) Has the company completed all of the restructuring and consolidation of the Kazaa offices?
5) Has the company completed the buildout of the Kazaa service?
While the buyer’s stike is understandable given these questions, some Groove members have started buying the shares again at these levels, as we think the risk/reward ratio is too attractive to pass up. We recognize that the company may sell stock or raise capital in some way that will cause some dilution for existing shareholders. However, the increasing investor fascination (see daily rumors related to Spotify, Apple and Google) with the streaming music space and increasing valuations for the current operating companies in the space lead us to believe that ATRN may be able to raise capital in a very shareholder advantageous manner and/or bring strategic investors into the fold whose value would more than make up for any dilution of existing shareholder’s stakes. While we have no first hand knowledge of such, we see this exact scenario already playing out with the other streaming music companies (MOG, Rdio, Spotify) and we see multiple outlets talking of Google’s tug of war with the music labels leading them to seek a partner in their race to offer a music service.
Another big factor cited among Groove members starting to buy more shares of ATRN comes from the amended 10K filed Tuesday night. A couple of months ago, we blogged about the “True Public Float” (Shares Outstanding minus Insiders, 5% owners and several Groove participants whom we know to have large positions of 1 – 3%) of ATRN, which we estimated to be in the eye-poppingly low sub 1 million share range. We quit discussing that aspect of the ATRN story over time as we were unable to determine if 5% owners and/or departed executives had sold shares that could have significantly increased the float and it had been several months since the last company filing that would allow us to determine an up to date ownership roster. Tuesday night the company filed its amended 10K that included the shareholder update. As of May 5 there are 6.29m shares issued and available with insiders/5% owners holding 5.16m of those shares. This leaves 1.13m shares available for a public float. A survey of Groove members who own significant positions indicates another 300-400k shares owned, bringing the True Public Float down to the 800k – 900k range. This confirms in near real time (filed May 5 and total volume traded since then very small) that there are very few shares available for public investors. It also makes it easy to see that any significant positive development would make the shares move up quickly.
The market continues to give ATRN a near bankruptcy type valuation ($16m) even though the company still has no debt and likely still has some (albeit small) cash in the bank. We know that Kazaa still has the US music licenses they paid over $100m for, the same licenses that Google, Apple and Spotify are fighting to obtain. We know that the company has been searching for a CEO to run Kazaa. We know that the company had a substantial (third largest in US) and growing (as of last report) base of “on demand” streaming music subscribers. We know that multiple outlets have reported that Google may partner with an existing company to beat Apple to the marketplace. We believe that each of these things we know makes or has the potential to make ATRN shares much more valuable and/or be a catalyst for the shares. Now that the marketplace knows that neither insiders nor 5% owners have sold stock during the challenging transitional period for Kazaa and the restructuring of Atrinsic Interactive, (even when they had a chance to do so at levels 200 – 300% higher than current prices) we would not be surprised to see investors begin to look past the near term issues and begin to focus again on the upside potential.