(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)
When it comes to investing in microcap stocks, the most difficult aspect can be separating the great "story stocks" that are years away from commercialization to legitimate emerging companies with "great stories". The difference between the former and the latter could mean the difference between being stuck in a hypothetical company and one that is destined for serious financial gains.
One such company is an emerging growth story named Elephant Talk Communications (ETAK) a Dutch-based provider of services to mobile networks. Its best known unit is ValidSoft, a security service aimed at stemming cross-border fraud by noting what country the phone is located and flagging transactions while they're being processed. The unit also offers voice verification for online transactions, calling buyers to confirm details.
The NYSE company already counts several leading worldwide service providers and institutions among its customers. These companies benefit from a very substantial reduction in false positives, thereby freeing up resources to combat actual fraud, as well as a substantial elimination of the fraud itself, all in real-time. ValidSoft recently held a successful demonstration its award-winning technology in front of an expert audience of over 1,000 people at one of the most highly-respected financial innovation conferences globally.
How does it work? Quite easily actually, the beauty is in the simplicity. By correlating the cardholder's mobile phone with the origination of an ATM or Point of Sale (POS) transaction, ValidSoft determines if the cardholder is in proximity to the transaction. If the cardholder's cell phone is in New York but the card is presented in Mexico, it's likely a fraudulent transaction.
Additionally, there is also no fear of infringing upon users' privacy rights or the feeling that big brother is constantly tracking your every move. ValidSoft operates anonymously. In fact, they are the only security software company in the world that has been granted three European Privacy Seals. This is the only accreditation program to promote such high standards of data protection and privacy compliance. It is also the only program capable of ensuring financial services institutions and consumers that the strongest and most sophisticated security solutions do not need to compromise privacy.
ValidSoft's latest authentication platform called SMART™ (Secure Mobile Architecture for Real-time Transactions) is designed to cater for the disparity in mobile networks, mobile devices, use case and the corresponding transactional risk intrinsic in mobile payment applications. SMART achieves this by providing a layered architecture of voice and mobile network-based security protocols and technologies, both visible and invisible, to protect mobile payment and M-banking transactions alike.
In addition to saving users headaches and time by eliminating fraudulent banking transactions, the company is also poised to save financial institutions millions by addressing the nearly $60 billion international fraud market. This type of technology is something that must be implemented worldwide, by credit networks and mobile operators. And ETAK, is clearly making significant progress. The company has signed contracts with Vodafone, and Zain for the delivery and management of mobile services.
Elephant Talk also has achieved some financial success recently, which is cause for serious investor confidence. In addition to boasting a recurring subscription and transaction-based high margin revenue model, the company's high margin mobile and security business revenue more than doubled year-over-year from $5.8 million for 2011 to $11.7 million for 2012. It hase also successfully achieved 7 consecutive quarters of growth in monthly recurring revenue.
While the company has had its shares of ups and downs, it certainly is in the minority of microcap companies that actually addresses a solution by doing what it says it can. A quick glance at the company's 2 year chart has proven that the stock price has been recently depressed. This appears as if it was due to delays in securing contracts. This problem seems to have been remedied and was overlooked by me as it is not uncommon for microcap companies to have longer than anticipated success. Elephant Talk also possesses analyst coverage and carries rather strong liquidity, trading approximately 360,000 shares per day. This is encouraging when compared to comparable microcap stocks that often suffer from lack of trading and little or no third party valuations.
The company has taken significant strides in order to mitigate additional risks of microcap stocks. First and foremost, its ability to continue adding sim cards to the Company's mobile platform and banking institutions to its anti-fraud division. There also appears to be some concern that such a small company (with a market cap just under $100 million) can truly be considered a market leader for a global problem that is valued at over $100 Billion. However, ValidSoft successfully conducted trials with many leading global banks and payment processors, who themselves processes billions of transactions a year.
Also, there is ALWAYS concern over microcaps and the efficacy of their respective products. Sure, sometimes they pass beta testing and even can demonstrate well in controlled settings, but it this something that can really work on a large scale? Well, ETAK is outpacing cynicism. The Company recently announced that it has successfully placed its first call on its Latin American mobile Software DNA™ platform with Iusacell, an innovative Mobile Network Operator (MNO) in Mexico. This first call was made yesterday morning between the CEO's of Iusacell and Elephant Talk.
Lastly, this company specifically mitigates risk by giving savvy investors two bites at the prosperity apple. It has TWO emerging business that are literally combined under one roof. They address a huge market, they have a simple cost-effective way to thrive in that market, and they have a proven management team that has been successful in the market in the past. The CEO has recently invested $4.5 million of his personal finances in order to assist in the company. That is good enough for me.
Disclosure: I am long ETAK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.