Archive for June, 2011
An interesting development has come together over the last three or four days. First of all, we received correspondence from three Groove participants updating us on their holdings, with two of them adding a substantial number of shares. None of the three are included in the 1.13 million float that can be calculated from the 10k/a filed in May, as none of them are “insiders” or “5% shareholders”. Individual investor A owns 215,0000 shares, Hedge Fund A owns 190,000 shares and individual B owns 100,000 shares for a total of 505,000 shares. This reduces that 1.13 million float in the 10k/A down to about 600,000 shares. We further note that former ATRN director Robert Ellin took down another 150,000 shares over the last three weeks, which would further reduce the float down to the 450,000 share range. Of course, this assumes that the insiders listed in the 10k/a are still holding the same number of shares they listed in the 10k/a, but we have to think that if they did not sell in the really difficult period in April where the stock fell so far (which would have been reflected in the May 10k/A filing), they would surely hang on now that the leadership transition is complete, iPhone/Android Apps are close to release and Wall Street is starting to take a closer look at all things related to streaming music companies. We compiled these figures to compare with what we saw to be a large and growing short interest in ATRN that started on the day of Pandora’s IPO. After the close on Friday, our suspicions were confirmed,as the short interest was reported at 415,000 shares. This figure indicates that about 90% of what appears to be the “true public float” has been sold short. Let me make sure that all reading this got that, its not a typo. These figures that we believe to be correct indicate that the true public float is about 450,000 shares and the Nasdaq reported short interest is over 415,000. We actually think the short interest is even higher than that, as the stock has fallen precipitously over the last few sessions on very low volume and it appears that short selling may have been a significant contributor to that decline. Also, we know that there are holders out there beyond these three that hold ATRN shares that intend to hold them long term, further reducing the number of shares available for purchase.
To have a stock with such a small float and such a large short interest is quite unusual, a truly extraordinary imbalance. With all the potential good news Kazaa could release and the media’s growing fascination with the mobile/streaming music space, it is amazing that short sellers would blindly pile on like they did following Pandora IPO. This might be a good time to put your shares up for sale at $9.99 (or higher if your broker allows it) so that they are “not available for hypothecation” and cannot be used as the other side of a short sale. Any uptick in buying interest could spark a short squeeze of significant magnitude here and there may not be enough shares to go around.
One More Thing – speaking of the “potential good news”, thought I’d share a quick laundry list –
1) Facebook Music Dashboard – this will bring on demand streaming music subscriptions to the mainstream, which will benefit Kazaa tremendously, maybe even more than any of the other FIVE companies that have the “on demand” licenses.
2) iPhone App / Android App – should be coming very soon, maybe in days
3) Name change to Kazaa – finally we can use the name that 800 million people will recognize instead of the made up word Atrinsic
4) Kazaa Radio – OK, its been live for several weeks, but the company hasn’t announced it and its a big deal. Maybe they wanted to give Pandora their week in the sun before they announced that Kazaa Radio is the same thing, but with 5 million songs in the rotation instead of Pandora’s 800,000.
5) Industry News – won’t be long until Spotify launches in the US, which will bring a huge amount of media spotlight onto streaming music generally, but more importantly onto the distinction between the “radio streamers” like Pandora and the “on demand” streamers, like Kazaa. Since Kazaa is the ONLY PUBLICLY TRADED on demand streaming music play, this will surely bring more investors into the picture.
When Pandora’s stock finally opens for trading today, the overall market cap of the company could be pushing $3 billion. One of our own published an article yesterday addressing the factors that could cause this to occur. One of the biggest impediments to Pandora extending or even holding that value long term will the increased competition all this attention is sure to bring. One competitor that just went live over the last month is Kazaa Radio. For mobile streaming music fans who like Pandora or generally prefer a radio style (ie randomly chosen playlist) service that is customized to their own favorite artists, styles or genres, they should give Kazaa’s new Kazaa Artist Radio a try. It works similar to Pandora, in that you enter an artist and the “automated DJ” compiles a playlist by that artist and artists that are similar. The biggest difference between Pandora’s radio and Kazaa’s is that Pandora pulls its playlists from a catalog of about 800,000 songs, while Kazaa Radio pulls its playlists from a catalog of over 5 million songs. ATRN/Kazaa has not even announced that Kazaa Radio is live yet, but I would be surprised if we don’t hear about it soon.
The pricing of Pandora will undoubtedly leave some would be streaming music investors pinching their wallets and thinking there has to be a way to invest in the mobile/streaming revolution without paying over 20x sales for a $3 Billion Pandora valuation. Those who do their due diligence will find that the only other pure play is ATRN’s Kazaa. I suspect more than a few will discover this over the next few days and this will drive the price of ATRN up. For those in our community who bought ATRN again back on June 5, you should not be so quick to take profits even if the stock jumps significantly over the next few days and weeks. The latest filing by ATRN indicated that there were only 1.13 million shares outstanding that were not held by insiders, directors and 5% owners. Several participants in this community (four to be exact) whom we knew to hold substantial positions in ATRN (but not exceeding the 5% filing threshold) have indicated ownership of over 400k shares as of June 14 and that they view ATRN as a long term holding. This means that the “true public float” is possibly in the 700,000 share range now.
There is much talk this morning among financial commentators about how Pandora’s small float is driving a huge price run up, essentially that the stock will fly because there are only 15 million shares to be had by US retail investors that want exposure to the white hot mobile/streaming music space. It will be interesting to see how many investors discover that there is a much cheaper way to get exposure to the white hot mobile/streaming music space through a company that has similar subscription revenue to Pandora over the last year, a newly released offering to challenge Pandora (Kazaa Radio) and somewhere between 750,000 and 1 million shares that they can buy at just over 1x sales (vs. Pandora’s 20x sales) and less than 1/4 the value of its US music licenses.
Thank you Atrinsic Board of Directors – yesterday we believe that the BOD granted us the most important item on our March 27, 2011 “BOD Wish List” in addition to securing a financing deal that not only provides a signal to us that management was unwilling to sell stock at the current price but it also allows management to focus on growing the business instead of day to day cash flow issues. The bigger news of the day was the hiring of Mr. Stuart Goldfarb, who in our opinion fully satisfies #3 on our list where we asked for a “rock star” CEO “with significant music industry and/or subscription business model experience”. Mr. Goldfarb’s experience in transitioning the BMG Music Club, Columbia House and other subscription driven pre-digital music legacy models into billion dollar revenue online businesses makes him the ideal candidate (in our opinion) to lead the re-emergence of the Kazaa brand.
Mr. Goldfarb’s first act as CEO on his first day was to bring in an industry veteran to serve as Chief Marketing Officer. This speaks volumes to where his focus lies and we could not be more pleased. One of the more unsettling things about being an ATRN shareholder the last few months has been that they have a very competitive and in some ways superior service offering (Kazaa) in a really hot space, but it did not seem that it was being marketed very aggressively. This combined with the lack of transparency, 11th hour SEC filings, lack of shareholder communication and obvious need for additional financing that could have caused much worse dilution led many shareholders (and many Groove community participants) to sell their shares.
Hopefully many of you took advantage of yesterday’s big Nasdaq sell off to start rebuilding your positions in ATRN, which barely moved despite releasing news that addressed the biggest issues that led to ATRN’s strikingly low valuation. Obviously, execution will be the key going forward and success will be measured by the numbers, but yesterday’s news was a major leap forward in regaining our confidence and we believe that investors who buy ATRN shares at today’s prices will see significant gains over the next few quarters.