Here is a very short summary of Majesco's (NASDAQ:COOL) latest results. If you want to read the complete report, click here. Three days ago, the company published its quarterly results which were very poor. The revenues declined from $66.2 million in the same quarter a year ago to $23.5 million (or a 65% decline) and posted a loss of $0.02 per share vs. a profit of $0.18 per share last year. The company expects a significant decrease in the revenues as well as a loss for the full year due to the industry's transition to new gaming consoles. Moreover, Majesco will release fewer titles this year compared to last year to preserve its cash position.
The aim of this article is not to comment on the earnings of the company but to look at one major release the company will do in the next months, the new version of the Zumba Fitness game.
According to the Facebook webpage, there are more than 5.5 million people who currently "like" Zumba Fitness. There were approximately 3.5 million in March 2012. To put things in perspective, it represents an increase of 57% on a yearly basis and it has been growing continuously since 2008 (see Google trends). Zumba Fitness has 14 million weekly participants and operates in approximately 140,000 locations all over the world (in 150 countries).
Now Zumba Fitness has reached an important level of penetration in the traditional fitness market, they are trying to expand the brand in other areas, in particular on the dance floor and nightclubs. This expansion will assure the growth of the Zumba brand. In order to penetrate this new market space, they have associated Zumba with artists like Lil John. If you visit the official website, you will see that five dates out of six are already sold out. These nightclub events are used to promote the new company strategy. That's good news. Therefore, we can guess but not prove that the new concept has a good chance of succeeding in this new space.
Now the point I am going to make is that Majesco can benefit from this market space to develop the new Zumba Fitness game. In the dancing video games sector, the main competitor is the well-established Just Dance series from the French video games publisher Ubisoft (OTCPK:UBSFY). But how can Just Dance compete with the popularity of the Zumba brand associated with artists like Lil John? If the game can attract both fitness gamers and dance gamers, it will be a huge proof in my opinion this strategy is taking off. Another key advantage of Majesco is that the company will benefit a lot from the marketing efforts of the Zumba Company to promote its brand in this new market space.
At $0.6 a share, I think Majesco is a really good opportunity to invest in according to the basic valuation measures. Indeed the price to book ratio is 0.91, the forward price to sales ratio is 0.31 (based on an $80 million annual sales estimation for the current year and a market cap of $ 25.13 million). The company has no long term debt and is currently sitting on a $ 26.76 million treasury (the information to calculate the ratios is based on Majesco's last quarter results and Google finance). Moreover, the key point to look at is the potential sales of the new Zumba Fitness game that isn't currently priced in the stock price. Finally, I personally think the management is really conservative regarding the outlook of the company and the stock price will not go under this level.
Nevertheless do not forget that there are several risks regarding the investment in Majesco. First, let’s mention the high dependence of the Zumba brand on the total revenues of the company (according to the last 10-Q filing, it represents 67% of the total revenues of the company). If the new Zumba game is not successful, it will have an important impact on the share price. Second, Majesco is a penny stock that means the share price is under $1. Therefore, the change in price could be huge on a daily basis and can substantially affect your investment.
Disclosure: I am long COOL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.