Artificial Life: Nothing Fake About This Software Company

I believe there are a lot of undervalued companies out there, especially profitable ones under $100M. Given this company's international exposure (offices in Hong Kong, Los Angeles and Europe) and ties with Apple (AAPL) and Google (GOOG), I don't think a better value exists. If stocks with share prices under $1 scare you, I suggest you look elsewhere. If, however, you're like me and place more emphasis on profitability and growth than economies of scale, I suggest you read on.

Artificial Life (ALIF.OB) is a leading producer of data mining software that earns most of its revenue from the 60+ iPhone games it has produced with big-brand-name partners, including professional sports teams, BMW, Red Bull, Linkin Park and others. The Company also supports Android, Google's open source platform.

I initially bought shares in April, within 30 minutes of first finding the stock. The Company, first achieveing profitability in 2007, grew revenues 400% in 2008 with an operating margin of 80%. This was not due to some single intellectual or physical property sale, quarterly revenues were consistent and increasing, making me optimistic for FY2009.

That optimism was reaffirmed last week with ALIF.OB's Q1 report for FY2009. First quarter revenue increased from $4.1M to $7M and EPS was 6 cents. Expenses did increase disproportionately, which is satisfactory given prior margins and Artificial Life's aggressive growth strategies. Good news for investors is that the stock has not appreciated much since it bottomed at 55 cents. The current price of 80 cents/share values the Company at 3.5 times trailing earnings.

Furthermore, it was announced on May 18 that Artificial Life has been chosen by China Telecom to develop, host and maintain its new 3G WAP portal. I won't try to estimate the value of this HUGE (couldn't resist) relationship, but Chinese consumers will also be getting a full line of applications and broadband entertainment from the Company.

Lastly, I believe this is a recession-proof company (not just because it has scored stimulus money from China). Most games ALIF.OB makes sell for $4.99 to iPhone users. There is no separate system to buy so these games benefit of being bundled with iPhones like ink is with printers. These games are not "Pac Man 2.0" either, they are technologically innovative and the best in their industry.

Disclosure: Long ALIF.OB

Comments

[Jason Schwarz:]

I love this company! Great article. The is a space any innovative tech investor should be in.

May 19 01:29 PM

[j03m:]

P+D?

May 19 08:58 PM

[Roy Manning:]

I found this stock last weekend when I was doing some stock scans. It really jumped out at me. I'm glad I'm not the only person to discover it. Great work Danny.

May 20 08:30 AM

[Danny Furman:]

Thanks for the positive feedback, and my response to P&D is LOL. Maybe dump at $4.50/share....

May 20 09:48 AM

[Dan Braem:]

Let's be real for a second. This company is very interesting - but if it is as good as it appears - someone like Electronic Arts or Blizzard Activision may snap it up. Any thoughts?

It is hard to value a company with revenue growing this fast (and profitable) - but my guess is that a big company would easily pay $200 million for this fast grower. However, I would like to qualify that I am not a technology expert. Any thoughts appreciated.

May 20 12:15 PM

[Dan Braem:]

Just looked at the financials - a big expense for these guys is related to amortization of license fees. The cash outlay for the licenses happens on the front end - so this is a non-cash charge.

The EPS figures may therefore be a little misleading...

I may be wrong - but it seems like the company is plowing cash into new license agreements. That can only fuel more growth.

May 20 12:24 PM

[Danny Furman:]

First off, I too am no tech expert.
Despite listing headquarters in Los Angeles I consider this a Hong Kong based company. The China Telecom deal was won over stiff competition and I expect China wants to keep stimulus money close to home. If the real decision makers' interests lie in HK and substantial growth is coming for them in that area, they have no incentive to sell for $200M. I, like EA or Blizzard possibly, really have a hard time putting a value on this company because I don't know what their Asian operations will bring in.
Also thank you, Dan, for putting the new license agreements into context. Operating margins should improve for reasons you gave.
Ultimately I see (almost?) no downside and great, yet hard to calculate, upside, so I am a happy holder.

May 20 01:30 PM

[Danny Furman:]

Investors interested in ALIF.OB may like MYST.OB, my biggest holding. Q2 09 reported today. It's a penny stock growing rapidly and trades at half of book value. China/Taiwan smallcaps are completely ignored.

May 20 02:34 PM