Update on ATRN, VTRO & Time for New Focus Stock Recs
Recent correspondence from community members indicates that most of you sold some and some of you sold most of your ATRN stock over last week or so. We believe this may prove to be a prudent move in light of recent events (and non events). Management’s silence during what were several extraordinary opportunities (Pandora IPO, US launch of Spotify, Seeking Alpha articles) for free Kazaa exposure leaves us to choose between two possibilities – either the new management team lacks marketing savvy or they did not want to appear to be too promotional in the face of poor operating results during Q2 (ie they do not want to issue positive Kazaa related press releases when they were soon to be issuing less than positive operating results). Given new CEO Stuart Goldfarb’s resume and past performance, we have to believe the lack of Kazaa related news/exposure is due to the latter rather than the former. It seems that his new team should be able to get a pass on a poor operating quarter since they were only running the show for the final month of that quarter and the lack of Kazaa related announcements could actually build their credibility with long term investors if that turns out to be the case. Of course, the question then becomes how bad was it and how will this impact their ability to grow the Kazaa business going forward? If we are wrong and there has been no Kazaa related news released because the new management team does not appreciate the value of “buzz” an offering in this space can generate (see Spotify’s 70,000 subscribers in the first week it launched due to this kind of exposure), we will be less than enthusiastic about ATRN/Kazaa’s prospects going forward.
While we have long argued the potential value of ATRN’s assets vs. its market cap, our last buy recommendation (July 7 @ $3.40) was based primarily on the imbalance related to shares sold short and the extremely small number of shares available to the public. We have seen smaller imbalances that resulted in single digit stocks trading wildly higher and this could still happen here given the right catalyst. For this reason, we think Groove investors who have not reduced their position may want to consider selling an amount that would cut their exposure down to the level of gain in the stock – time to play from here forward with “house money”. Those of you still holding from our original buy rec at $1.20 have a nice 200%+ gainer, those who bought (or repurchased) on our urging on June 2 ($2.50) have a 50%+ gain. Those who bought only a few weeks ago with our $3.40 buy/hold rec. are only up 10%, but we do feel for the reasons indicated above that all would do well to move forward with caution from this point, with some “dry powder” to buy more shares if some of our concerns turn out to be unfounded and/or management communicates to shareholders that the Kazaa business is on track to achieve the potential that we believe it has. We note that this could occur very soon, as the deadline for filing Q2 results is but two weeks away and ATRN management will have the opportunity to update investors on Kazaa’s progress at that time.
We have not updated the community on Vertro, our original community stock for a couple of months now. As indicated in our last update, we think our community members who are still holding their “house money” shares should expect the stock to face an uphill battle until the Q3 results become clearer due to changes required by Google that took effect in July. We expect these changes to have a significant (potentially double digit) negative impact on Vertro’s search revenue, which has historically accounted for about 90% of the company’s overall revenue. While we recognize that the company has been working to develop new sources of revenue, this does not happen overnight and it could be 2012 before the company sees a significant contribution from these efforts.
August is the time each year where we ask our community to send suggestions for an additional stock to add to our focus list. Recommended stocks should share many of the same characteristics of our first two recommendations in that they are small cap companies, they are undervalued relative to their assets and/or prospects, their results are driven by products sold to consumers and they are small enough that a group of several thousand consumers using their service and telling their friends to use it could make a difference. Please send your suggestions to us at email@example.com
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