Sungy Mobile (NASDAQ:GOMO) began trading Friday morning. The IPO was priced at $11.22, the high end of the $9.50-$11.50 range, but the stock opened for trading higher yet at $14.11. Investors appear enthusiastic about this mobile app powerhouse.
Sungy offers products to help users manage the functions, apps, and widgets on their Android-based phones. Sungy's GO product line applications integrate with the Android operating system. They are extensions, add-ons, and enhancements to the operating system, running between the OS layer and the apps themselves. The GO Launcher platform is always running and visible to the end user as if it was part of the Android operating system. Examples of their apps are the Go Locker and Go Launcher platform.
One advantage Sungy has over some other mobile application companies is that instead of needing a user to open a specific app, say a gaming app, in order for a company to reach and interact with the user, the GO Launcher platform is always running on their mobile device. This brings Sungy and its revenue generating offerings-such as third party advertising and premium offerings-closer to the end user. This visibility is an advantage that may explain Sungy's ability to monetize from mobile users.
Sungy's product is well adopted as seen by total downloads on Google Play. Per App Annie Intelligence Report, the top 3 publisher rankings in 2013:
1. Facebook (NASDAQ:FB)
2. Google Inc. (NASDAQ:GOOG)
3. GO Launcher Dev Team
Sungy is growing its GO product line user base very rapidly. The table below pulled from the prospectus shows active user growth up almost 250% in the last year and a half. Total users are up a whopping 300% over the same period.
Sungy is also growing revenues quickly. But unlike many others in this space, the company is actually generating profit. The first nine month 2013 financial figures shown below have already exceeded full year 2012 numbers.
Full Year 2012
First nine months of 2013
Valuations in the mobile space vary greatly, but in general, they are well above what is applied to most other sectors due to rapid growth. Many of these mobile companies are not profitable, debt-ridden, or still pre-revenue. Sungy Mobile on the other hand has done about $10 million in net income for the first 9 months of 2013 and has no debt. Projecting out, the company should do at least $13.5 million in income for the full year 2013. Even if growth is slowing (from 80%-90% growth), the company is still currently generating revenues at least a 60% year over year clip.
As the share price shows during the first day of trading, Sungy certainly is not "cheap". The company commands a premium PE ratio, clearly above the market average. But this valuation is not completely irrational. Net income went from a loss in 2011, $2 million profit in 2012, to $10 million already this year. It is not out of the realm that this growth will continue in 2014 (in fact it appears likely). Worldwide mobile users and devices are set to continue growth. Sungy has shown it can compete and profit from this trend.
New Key Development
A key development has occurred in the past few weeks that should not go unnoticed by investors. Sungy has worked deals with Chinese mobile handset makers to integrate the GO Launcher platform directly into phones when they are being produced. The software started being pre-installed on these mobile devices after the quarter ended September 30th, 2013. From what I can tell, this means the success of this endeavor has not been included in pre-IPO numbers of user count or revenue, which only run through the quarter ended September 30th 2013. In fact, Sungy recently reported during a presentation that an additional 16 million users were added on the GO Launcher platform due to the initiation of this program. This accomplishes two goals:
- Since Sungy's offerings improve the phone as a product, the company has negotiated the integration of their products onto phones for free. Companies often pay to have their apps pre-installed on devices. This has enabled an even lower acquisition cost of new customers and gives them a leg up on the competition which often pays for this placement.
- Pre-installation eliminates users having to find, decide, and download the GO products. This should (and appears to already) have a meaningful impact on user growth. Sungy plans to expand the pre-installation of their products into handsets globally in the future. The success of acquiring new users through pre-installation is evident by the numbers. Further, the company has shown the ability to effectively monetize these users, which should lead to increased revenues in the coming quarters.
Like any company, Sungy comes with risk. With valuation lofty, the company must continue to grow over the next couple of years to justify its share price. And while Sungy has demonstrated the ability to successfully compete in the mobile app space, this sector is highly competitive with the cost of entry very low. The GO product line is also very dependent on the Android operating system.
Sungy Mobile is based in China and part of the business structure resides in the Cayman Islands. Although this provides a better tax structure, it offers less protection for investors. Investors should also take note of the share structure and equity-based compensation.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GOMO over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.