Upgrade to Aggressive Buy on Remark Media
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.
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