Artificial Life: A New Stock for Apple's App Store Dominance

The Apple (AAPL) app store is a game changing distribution model for software developers. 3G mobile internet connection speeds have enabled the distribution model to really take off to the tune of 1 billion app store downloads in less than a year. There’s a small cap company that you need to know about who is perfectly positioned to benefit from the mobile boom.

This sector is one of the only things booming right now. Gartner research just released data showing that worldwide mobile phone sales totaled 269.1 million units during the quarter, a 8.6% decrease from the first quarter of 2008 but the smartphone segment of the market surpassed 36.4 million units, a 12.7% increase from the same period last year.

The company you need to know about is Artificial Life, Inc.(ALIF.OB)

I love finding new companies who show the ability to innovate in a growing sector of the market. Artificial Life fits the bill. These guys develop 2D and 3D multi and single player rich media applications for 3G and 4G network enabled mobile phones. They claim to be the worlds first full service broadband mobile content and technology provider. They have formed relationships with BMW, Linkin Park, Red Bull, professional sports teams, and Starz Media to develop their apps in 2009.

The earnings numbers Artificial Life reported on May 13th were stellar. They grew revenue at 70%, they sold 3,443,000 mobile 3G and Java games, they launched their first seven iPhone/iPod touch games and generated 1.2 million downloads, and they produced their seventh consecutive profitable quarter. CEO of Artificial Life, Eberhard Schoneburg said on the conference call,

As a result of the many TOP 10 rankings we achieved for our games in many countries we got very positive feedback from partners and clients and are now experiencing even more interest from global brands to work with us to launch more iPhone apps.

Going forward we are especially excited about the opportunity to work with Linkin Park on a first music community iPhone game which we anticipate to release end of Q3, 2009. Other upcoming highlights for our iPhone gamers will be the BMW F1 racing game in 3D which is scheduled for release at end of Q2 and the imminent release of our new and very funny iDroids(TM) series.

The iPhone apps are just one part of Artificial Life’s exciting future. Part two is China.

On May 18th the company was chosen by China Telecom (CHA) as a subcontractor to develop, host and maintain its new 3G WAP portal. 3G is just now being implemented in China and this deal gives Artificial Life a chance to provide network subscribers with their apps, games, and mobile broadband entertainment.

Mr. Schoneburg commented,

It is an honor for us to be chosen as one of the key content providers for the newly-launched 3G networks in China by China Telecom. With our extensive and unique global experience with 3G networks and 3G mobile content, we are able to offer highest quality 3G content and services to this market with the biggest growth potential of all 3G markets in the world. We are now looking forward to a successful expansion of our business into China.

Rumors are also circulating that Apple will be releasing a 10 inch touchscreen Media Tablet in the second half of 2009. If this happens, the relevance of applications will only be enhanced as the larger screen caters to gaming.

Artificial Life appears to be the right company at the right time. The stock price is only at 1.05 because investors are unsure if the company can keep up their momentum and fear that future growth capital needs may present dilution to shareholders.

Investing in a company with a market cap of $49 million is a risk, but these concerns are not enough to keep me out of this stock. Apple + High Quality Gaming Brands + China 3G = A high probability of future success.

DISCLOSURE: LONG ALIF

Comments

[Roy Manning:]

I bought some ALIF about 2 days ago at .83 a share. The stock has strong earnings and is growing rapidly. Its P/E is only about a 4 which is very low for a growth stock. Yesterday ALIF was up almost 20% - I think thats just the beginning. $50 million dollar stocks that are making great money are few and far between.

May 21 08:09 AM

[streetsmarty:]

Great information for Aaple followers. Thanks Jason Schwarz

May 21 08:36 AM

[Charlie P:]

Tks, I'm going to get me some

May 21 09:18 AM

[CacheCow:]

Thank you for your insightful analysis. ALIF certainly looks interesting and got added to my watch list right after I read this. The only thing is, ALIF isn't yet a cashflow generator and they've very thin liquidity it seems at this very moment and some ~$1.6mil in short-term debt coming due. I'm looking for confidence that they can survive the short-term debt. I just began my own DD on ALIF, but thought I'd post in case you've already done this leg work. Thank you.

May 21 09:23 AM

[CacheCow:]

417703=CacheCow
from the 10Q:
"The Company has a revolving note payable to its chief executive officer for advances made by him to the Company, as well as deferred salary and bonus. The note bears interest at 5%, and is unsecured and repayable until sufficient new funding for payback is available. "
"At December 31, 2008, the Company has promissory notes payable to two non-related party stockholders for an aggregate principal amount of $1,000,000. These notes are unsecured, bear an annual interest rate of 10%, and matured on December 31, 2008. These notes are due on demand, and the holders may convert the notes and any unpaid interest accumulated thereon into shares of common stock at a conversion price of $2.50 per share. These notes were determined not to have any beneficial conversion feature, as the conversion price exceeded the market price of the Company’s common stock."

the 'due on demand aspect' is a little bit irky, but given the potential revenue and earnings growth here, one would hope they dont demand repayment in cash any time soon. Simply a risk in one is a high potential growth stock. I'm still interested.

May 21 09:36 AM

[Charlie P:]

After checking Apple's APP Store I found almost no visiibility for the applications produced by AL. I know this is an issue with divelopers in general. However, the China and BMW connection is impressive. BMW is one of the few car companies that provides OEM connection for IPhone.

May 21 10:02 AM

[Dan Braem:]

Cache Cow - Good catch. I think the capital structure is fine, although you never know for sure. I think the company generates a good level of cash flow, but most of it is reinvested into new license agreeements. Obviously, the license agreements are key to new products and future growth. If they needed cash and couldn't raise it, they could simply stop doing new deals and make money from their existing products.

I am not an expert in I-Phone Apps. Is anyone familiar with any of ALIF's games? It seems like the Robot game may have a nice little niche...any comments appreciated.


On May 21 09:36 AM CacheCow wrote:

> 417703=CacheCow
> from the 10Q:
> "The Company has a revolving note payable to its chief executive
> officer for advances made by him to the Company, as well as deferred
> salary and bonus. The note bears interest at 5%, and is unsecured
> and repayable until sufficient new funding for payback is available.
> "
> "At December 31, 2008, the Company has promissory notes payable to
> two non-related party stockholders for an aggregate principal amount
> of $1,000,000. These notes are unsecured, bear an annual interest
> rate of 10%, and matured on December 31, 2008. These notes are due
> on demand, and the holders may convert the notes and any unpaid interest
> accumulated thereon into shares of common stock at a conversion price
> of $2.50 per share. These notes were determined not to have any beneficial
> conversion feature, as the conversion price exceeded the market price
> of the Company’s common stock."
>
> the 'due on demand aspect' is a little bit irky, but given the potential
> revenue and earnings growth here, one would hope they dont demand
> repayment in cash any time soon. Simply a risk in one is a high potential
> growth stock. I'm still interested.

May 21 10:07 AM

[406597:]

How on earth can a company growing revenues and earnings like this one possibly trade at a 3 or 4 PE? Revenue growth has slowed down somewhat, that's true. Seems like the game business is a lot like any entertainment business though where a hit or two makes a huge difference in revenues. And I don't think they have a mega-hit game yet, do they? But how, how, how, with the apple tablet coming and with China coming on line and with the deal with CHA and with Jobs enthusiasm for the ap store in general and with mobile gaming certainly being one of the sweet spots of the mobile cellphone computing revolution... whew... I'm out of breath. How on earth can this stock trade a a 3 PE. I checked my iphone and the games they make as of now are not ranked all that high in ap store sales. But that only leaves room for improvement right? And I can't find the Linkin Park game yet. Is that out? And even with no real blockbuster game yet they still should make 25 cents a share this year.
Anybody? How can this stock not be at like a 20PE and sell for over $4. I'm asking cause I don't know. I am long the stock with a small position and am considering going into a larger position if the stock hits the low 70's. 73 cents. 74 cents. Something like that.


On May 21 08:09 AM Roy Manning wrote:

> I bought some ALIF about 2 days ago at .83 a share. The stock has
> strong earnings and is growing rapidly. Its P/E is only about a 4
> which is very low for a growth stock. Yesterday ALIF was up almost
> 20% - I think thats just the beginning. $50 million dollar stocks
> that are making great money are few and far between.

Aug 23 11:17 AM

[dual cit:]

Now this stock appears to be on the verge of a strong upward move. It would be nice to get some further analysis form those close to the company.

Sep 24 10:57 PM