Archive for December, 2016
At yesterday’s close we published our “aggressive buy” upgrade to get our high level thoughts into the hands of our investment community while the stock was still trading at levels that do not reflect the transformative impact of yesterday’s news. There has clearly been a great deal of tax loss selling (note that the stock is still trading just marginally above the 52 week lows set a few weeks ago) and it could continue into today’s final trading day of the year and we see this as an opportunity for many to establish new positions and/or for those still holding from our original buy rec several years ago to start to add shares again.
For those new to the Remark story, we “discovered” Remark Media about four years ago and published research pointing out the ridiculous value it represented at $1.65 per share. The stock subsequently ran to $10+ and we recommended that investors take their gains off the table at $8+. We have published mostly neutral or bearish reports since that time, as we could not wrap our head around the Kan Kan investment. Remark was essentially incubating a social media data start up over the last two years with capital investment of upwards of $15m and it was difficult to quantify what value (if any) the platform would create for shareholders. Like many start ups, Kan Kan was a big capital drain that produced little to no revenue. But that has all changed in the last 60 days, as the company has signed multiple agreements with various entities to provide services related to its Kan Kan Data Intelligence Platform. Deals with Tencent and other companies to use Kan Kan’s social media credit scoring platform and the new deal with Alibaba that we believe will lead to many new deals with other entities will further monetize the Kan Kan platform and may push the revenue generated by Kan Kan in 2017 well ahead of our $6m estimate. We note that there is very little incremental expense associated with each new company that partners with Kan Kan and the boost in revenue that we expect to see as a result of the new deal with Alibaba could have a dramatic impact on the company’s margins going forward.
We believe that the value of Remark’s 5% stake in Sharecare is +/- $80 million if an arms length transaction occurred today, but we would expect any liquidity event with Sharecare itself (IPO, acquisition, etc.) to result in a substantially higher valuation. Some have pointed to an $800,000 equity investment in Sharecare that Remark made in 2015 to argue for a very low valuation of Sharecare, but they are apparently unaware that Remark’s original agreement in the development of Sharecare included anti-dilutive provisions that allow Remark to maintain its ownership stake on a percentage basis when certain dilutive corporate events occur. Remark has an option to invest cash based on the much lower valuation specified at the outset of that agreement and the recent $800k purchase is another example of the benefit the company continues to reap from what it sowed a half decade ago.
The bottom line here is that the stock price essentially gives the operating businesses of Remark Media to investors for free, as the Sharecare stake will prove to be worth $80m or more and that represents the current market cap it its entirety. We believe Remark’s three operating businesses (content/commerce, online travel/ticketing, Kan Kan) will prove to be worth substantially more than the $80m Sharecare stake and the current valuation now represents a disconnect on par with that we discovered when Remark was at $1.65 four years ago and we see any chance to build a position in Remark Media shares below $4.50 as a tremendous opportunity.
We have encouraged investors to be cautious with Remark over the last 12 months, as the acquisitions (of Vegas.com and China Branding Group) transformed the company’s financial statements and outlook, while the company continued to pour significant resources into the development of its Kan Kan Data Intelligence Platform. While the acquisitions had very clear and compelling top and bottom line implications and potential for growth, we were concerned about the runway for the Kan Kan project and found it’s potential difficult to quantify. For this reason, we encouraged investors to take a “wait and see” approach until there is tangible evidence of value creation and the potential for Kan Kan to produce revenue.
The announcement today of Kan Kan’s selection by the AliBaba Cloud Group to provide its advanced facial recognition and image classification services to Alibaba cloud’s Robotic Vision Ecosystem Union represents a huge step forward in the company’s growing relationship with Alibaba and (according to Remark CFO Doug Osrow) a very significant revenue opportunity that will impact the financials in the first half of 2017. This is the traction we have been waiting to see and we believe it is now time for investors to aggressively accumulate Remark Media shares again. With the stock up only 1.3% since the news was released this morning, we believe the lack of investor recognition of the implications of this deal plus what is likely end of year tax loss selling presents a tremendous opportunity for adding shares.
After the close yesterday RAVE Restaurant Group announced a $3 million shareholder rights offering that will allow each shareholder to purchase convertible notes redeemable for Rave stock at an exercise price of $2 per share. These non-transferable rights are being granted to all shareholders as of December 21, 2016, so it appears that the offering and conversion price were set based on a 10% premium to the closing price of Rave ($1.82) on Dec. 20. Shareholders can purchase one $100 note paying 4% interest for every 355 shares that they own. Newcastle, the company’s largest shareholder whose principals include Rave CEO Clinton Coleman and Rave BOD chairman Mark Schwarz announced that they will participate and have essentially already paid in the full amount ($1 million) that they can invest under the deals terms based on their holding of approximately 1/3 of the company’s outstanding shares.
It is important to note that there is also an over-subscription right that will allow holders who exercise their rights to the full extent of their holdings (which Newcastle already did) buy any remaining rights not exercised by existing shareholders. Thus, if existing shareholders do not exercise their right to purchase these notes, Newcastle can exercise its over-subscription rights and essentially buy approximately 15% of the company for $3 million.
This presents an interesting situation, as shorts have sold hundreds of thousands of shares in a bet against Rave. These shares have been borrowed from shareholders who have made their shares available for hypothecation and sold, but the shareholders have just been awarded the right to purchase these convertible notes, be paid the 4% coupon and ultimately convert the notes into 50 additional shares when they choose to do so. Those who were short Rave stock as of December 21 will have to provide those rights or buy shares to replace the ones that they borrow and sold.
It also bears consideration that many short sellers made the bet in anticipation of a capital shortfall for Rave. With the company receiving a capital infusion of $3m as part of this offering, any pressure due to capital concerns will no longer be a factor at least for the next year or so.
The bottom line here is that this offering is giving shareholders an opportunity participate in Rave’s capital raise in proportion to their existing stake in the company. To the extent that some choose not to do so, the largest shareholder of Rave (Newcastle) will be able to increase their percentage stake. And the entirety of the situation will provide some very interesting and not too appealing options for the short sellers who have bet against Rave.
A quick update on the Groove VC watchlist. Last week’s LD Micro conference was fantastic and the Groove community was well represented by investors as well as portfolio companies as both Inuvo and Remark Media made impressive presentations.
Inuvo – Inuvo’s stock notched a major uptick in price and volume over the course of the week following the release of news regarding the company’s record Cyber Monday results and this move was likely extended by the bullish presentation by CEO Rich Howe at the conference. Inuvo seems to have regained much of its operational momentum with recent revenue trends indicating significant sequential improvement and we believe this could be an inflection point for Inuvo stock. Comments during the presentation indicated a positive shift in the revenue picture over the last few weeks generally and management bullishness was at a level we have not seen in a while. Additionally, we believe that Inuvo will increasingly be viewed as a prime acquisition candidate, as investors scour the landscape for the next ad tech company to be targeted by Chinese firms flush with cash and highly valued stock deal currency. The recent acquisition of Inuvo comparable Media.net for an eye-popping $900 million itself requires that investors take a closer look at Inuvo’s operations and relative valuation. Inuvo’s stock is quite cheap versus the value its operations and revenue stream could bring to many companies who appear to be shopping in the ad tech space.
Remark Media – Remark CFO Doug Osrow presented at the LD Micro convention this week and gave a very favorable update, highlighting the recent deals that will for the first time begin to monetize the KanKan data mining operations. He also indicated that they see such deals as just the tip of the iceberg, with many more similar deals in the works that will drive additional revenue over the next year. We were also interested to learn of Remark’s increasingly close ties with Alibaba, as we were previously unaware that many of the engineers working on the KanKan project are working at an Alibaba facility in China. This was one of several indications that we see indicating that the company’s operations are getting more and more intertwined with both Alibaba and TenCent, which we perceive as very favorable for the long term potential of the KanKan project.
Other key takeaways:
– Remark continues to improve conversion metrics for ticket and hotel room sales at Vegas.com and they gave examples of changes that will be made over the next couple of quarters that they think will result in continued improvements in the rate of conversions.
-Sharecare – Remark’s 5% stake in health care portal Sharecare contiues to grow in value and recent disclosures related to an acquisition have indicated a $500m revenue run rate for Sharecare. Comparable valuations in the space put its likely valuation at a levels that could make Remark’s Sharecare stake worth $50 to $100m when it comes to market, which could mean that the Sharecare could prove to be worth the company’s current valuation by itself.
Rave Restaurant Group – RAVE’s Pie Five subsidiary is accelerating the roll-out of new restaurants in new markets, with 3 new Pie Five restaurants opening in three new cities in the 7 days ended last Friday. On a recent conference call management indicated that this “acceleration” of new Pie Five openings will continue over the next six months and we note the positive revenue impact ($50k+ per year) of these openings versus the negligible capital required with new franchisee owned restaurants.
Pie Five continues to be a trailblazer among the bigger players in the fast casual pizza space, beating competitors Blaze, MOD, Pieology and Uncle Maddios to the punch with the first drive through location (one opened last week and another will be opening soon) and the launch last week of its new app that connects with third party delivery services in select markets. Both the drive through and the app that allows orders to be delivered are industry firsts though several of the other players have indicated that they expect to experiment with third party delivery as well. We continue to see Pie Five as an innovator in the fast casual pizza space even though its parent company Rave Restaurant Group’s stock continues to be overlooked. We believe that RAVE stock trading at 1/10th the valuation of MOD Pizza’s equity raise last month suggests a tremendous opportunity to buy shares at prices that are still heavily discounted.