MEDL Mobile: A Pure Play On Apps

| About: With, Inc. (WWTH)

Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.

MEDL Mobile (MEDL) is the rare company solely focused on developing and marketing apps. You see, there are plenty of choices for investors looking to buy into the $280 million smartphone market. However, there are far fewer choices for those looking to invest in the app industry.

It doesn't make a lot of sense to me because it's the apps that really make a smartphone what it is. (And, it's why I believe smartphones have grown into such an enormous industry.)

Let's look at some of the data:

  • 56 billion smartphone apps will be downloaded in 2013, plus another 14 billion tablet apps.
  • By 2017, that number could reach 200 billion apps downloaded.
  • Apps are expected to generate $25 billion in revenues in 2013.
  • By 2018, an estimated $92 billion will be shelled out for apps.

Before I get back to MEDL, let's take a closer look at the industry.

The Industry

The truly amazing aspect of this industry is there really isn't a lot to choose from in terms of companies to invest in. Sure, there are companies like Zynga (NASDAQ:ZNGA) - but it has had more than its fair share of well-publicized problems and is struggling to grow business.

There are also bigger players like Electronic Arts (NASDAQ:EA). But, EA is involved in a whole lot more than just apps. Apps are a very small part of this software giant's business. The same holds true for many other public companies which develop apps - it's simply not their priority.

The trick is finding a pure play app company. To find such a business, I had to do some digging. That is to say, I included OTC stocks in my search before I finally found a company with the right profile.

However, if you're interested in the investing in a pure app company, you'll be hard pressed to find a better fit than MEDL.

The Company

MEDL develops, acquires, and publishes mobile applications for Apple and Android devices. The company's business model is set up to generate revenue streams from multiple sources. These include development fees, download and in-app purchases, licensing fees, advertising, and others.

There are a few reasons why MEDL caught my eye, but most important is the company's focus on getting the right content (apps) to the right people.

Essentially, the company serves as an app incubator. One of MEDL's functions is receive ideas for apps, through the web or through an "incubator" app. If the ideas have potential, MEDL will develop the app, sharing the proceeds with the creator.

MEDL also engages in custom app development as part of a broader strategy to develop mobile strategies for recognizable brands (such as and The New York Times) and famous people (such as Sarah Silverman and Cheech & Chong).

One example of how MEDL partners with celebrities is the company's "Hang w/" social media platform. Hang w/ allows anyone to broadcast live from their mobile phone to thousands of users (or more) simultaneously.

So far, Hang w/ (technically a subsidiary of MEDL) has shown strong organic growth despite no real marketing efforts:

  • The platform has hit the 500,000 user mark in under six months. (I received an email from MEDL investor relations saying the user count is now 700,000 but as far as I can tell it's not published anywhere else.)
  • More than 1.7 million broadcasts have been made with over 10 million user sessions
  • Average session duration for users is nearly 4 minutes.
  • Over 75 celebrities and athletes have joined the platform including Paula Abdul, Terrell Owens, and 50 Cent.

MEDL earns ad revenues from pre-broadcast and post-broadcast advertising which the company shares with the broadcasters. In addition, Hang w/ recently raised $2.6 million in seed money (from friends and family) which will be used to aggressively scale the platform (according to an email I received from investor relations).

Finally, MEDL is developing the technology to optimize distribution and marketing of apps. The company has created the "Mobile Brain" which collects unique data points from users downloading apps from the MEDL Library. It uses those data points to recommend apps relevant to a certain user. The more that user downloads apps form the MEDL library, the more intuitive the Brain's recommendations become.

The Financials

As you may expect from a developmental, microcap company, MEDL's financial picture is a bit murky.

In the most recent quarter (ending June 30th), revenues came in at $410k. That's below the $445k from the year ago period. According to management, the decrease is primarily due to the reduction of customized mobile applications so the company can focus on the roll out of Hang w/.

In addition, net loss for the period increased from $867k last year to $905k, a 4% year-over-year increase. Management attributes the bigger net loss to a shift in focus to the development of the Hang w/ app.

The company's balance sheet shows just under $13k in cash compared to $500k in debt from a credit line. MEDL also has negative working capital of $327k. At first glance, this would appear to be a problem. However, in the 10-Q, we can see the company's Hang w/ subsidiary raised nearly $2 million in a private, off-shore transaction to finance product development. As MEDL owns 86% of Hang w/, that money will at least in part be used to cover cash needs.

The Risks

As a microcap company, MEDL has its share of risks, primarily related to cash generation and cash flow.

Basically, the company has sacrificed revenues in the short-term in order to develop "the next big thing" - in this case, Hang w/.

On one hand, the company projects Hang w/ to generate $45 million in revenues by Q4 2014. On the other hand, MEDL appears to be betting the farm on this app.

As I mentioned earlier, I received an email from MEDL saying the company recently raised $2.6 million of friends and family money to more aggressively roll out Hang w/ (this after the $2 million raised in July from the off-shore transaction). So while the company is raising funds to support the app's development, they're also betting heavily that Hang w/ is going to put them on the map.

Hang w/ is definitely generating the appropriate buzz so far. Now it's up to management to turn it into a cash cow.

The Valuation

MEDL has determined through robust testing of purchases and download recommendations, the average lifetime value of a consumer who uses the MEDL library is $25 to $35. With roughly 3 million consumers, MEDL has an implied market value of $75-$100 million.

As of this writing, MEDL's market cap was sitting at just over $12 million. In other words, the company appears to be trading at an extreme discount. With MEDL's rapidly growing user base (due primarily to Hang w/) and a very experienced management team, I think it's more likely than not that MEDL will trade at higher multiples.

The company's fortunes are tied up with Hang w/, and at the moment, it appears to be a savvy decision.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.