Artificial Life: Nothing Fake About This Software Company

Includes: AAPL, ALIF, GOOG
by: Danny Furman

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 (NASDAQ:AAPL) and Google (NASDAQ: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 (OTCPK:ALIF) 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