The Next Focus Stock and Buying AUGT Anyway

February 27, 2013 at 9:43 am Leave a comment

We have received several submissions of ideas to be our #2 focus stock to replace Travelzoo.  I am writing a note about one (AUGT) that we will not be our next focus stock and I am doing it because I think many in our community might want to buy shares anyway.  The reason we are not making it the focus stock is it is kind of like the reason we are now longer focusing on Travelzoo in that we do not see a clear and direct way for our members to use their products in a way that could have a material impact on the company.  That aside, AUGT is the picture of a stock we would buy and we think it has the potential to offer strong triple digit (100%+) returns over the next twelve months and possibly much sooner than that.  The stock closed yesterday at $.291 and again touched the multi year low it had set the previous day.  The stock has been getting murdered and it appears that investors/traders are throwing out the baby with the bathwater.  

Here is the lowdown –

Augme Technologies (AUGT) owns HipCricket, one of the most significant players in the mobile marketing/advertising space.  HipCricket has been on a tear growing over 15% sequentially and projecting this to continue for the forseeable future.  HipCricket management has executed quite well in a space where the same can not be said for many of the larger players (Millenial Media, Velti), but its stock has been beaten down due to multiple dilutive stock offerings that were necessary to help the company fund an IP Litigation strategy built around its large stable of mobile and VOIP patents.  While it appears there is the potential for substantial value to be realized from the patent portfolio, the company’s shareholders have experienced the difficulties that can come through the pursuit of the enforcement through litigation approach by a company that has an operating business that actually uses the patents. The company made a decision to refocus its resources on the fast growing HipCricket business and the founder of HipCricket will be taking over as CEO of AUGT as of tomorrow.   AUGT was trading at 89 cents less than 50 days ago (January 9 closing price – $0.89), but saw its valuation destroyed as word of the last stock offering pushed the price down below 60 cents and resulted in the actual placement occurring at 49 cents on Jnauary 30.  Since that time, the perfect storm has emerged to push AUGT down further as investors digested poor quarterly reports by two of the larger players in the space (MM and Velti), the departure of interim CEO Paul Hussey and the settlement of the company’s case with AOL for $650,000 (much less than many expected). As often happens with microcap companies, the decision by some significant holders to sell their stakes was met by more selling which begat more selling and the stock fells another 40%.  AUGT has fallen 67% in the 50 or so days since reporting a very stellar quarter for the HipCricket business that was (as usual) overshadowed by the cash draining IP litigation, even though the company has now completed the restructuring it undertook to refocus its resources to grow the HipCricket business.

The market cap of AUGT now values the company at about half what it paid to acquire a HipCricket business that was less than half its current size at a time when the mobile marketing/advertising space was just beginning its meteoric growth stage.  We believe there remains substantial value in AUGT’s core mobile patents that shareholders will ultimately benefit tremendously from them whether it be through a deal with an NPE to pursue licensing revenue or a buyout by a larger player seeking the protection and licensing revenue that could be achieved by these patents being in the hands of an owner with deeper pockets.  In either case, AUGT is worth substantially more than its current trading price and we think investors at current prices will more than double their money over the next 6-12 months as the market begins to see the HipCricket for its true potential and the street gets a clearer picture of the value that will be realized from the patent portfolio.

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