Majesco Entertainment: Is A Turnaround In The Works?

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 |  About: Majesco Entertainment Company (COOL)
by: Pinnacle One Research

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Setting the stage: It's been a tough 2013! Majesco Entertainment (NASDAQ:COOL) has had a tough 2013, with revenue falling 49% in FY2013 (Oct) YOY, a significant hit with a fixed cost infrastructure of developers to carry. Similarly, COOL shares have lost 42% of their value year-to-date, a wallop of a share price hit that leaves many investors wondering what the future looks like for this small firm. Indeed, with shares now trading below $1.00 for almost one year, COOL even faces some NASDAQ delisting risks. Regarding this, though, we think management can avoid this calamity with a reverse split and will not let trading move over to the bulletin board pink sheets.

Cutting right to the chase: We think shares sport solid risk/reward with upside towards $1.00. While indeed, it can seem grim for COOL investors, we actually think shares sport attractive risk/reward dynamics with possible upside towards $1.00 per share if any positive developments occur. We have a few main points: (1) shares sport an Enterprise Value of roughly $13 million, or 0.25x EV/Sales, and are discounting no future recovery; (2) the firm has enough cash on hand to sustain it for the next year, in our view, and is not a going concern; (3) Majesco is in a hits-based business, so if any halfway decent title(s) gets launched in 2014, shares will likely head to $1.00; and (4) the firm is migrating some development resources and focus to casino- and mobile-based gaming, more lucrative and growthy sectors. So, in short, while we do not have any specific catalysts identified, we think this company is worth solidly more than $13 million, and that there is a reasonably decent chance that Majesco's gaming developers are working on something new and exciting for 2014.

Business overview: COOL is a provider of video game products primarily for the family oriented, casual-game consumer. Its products are sold primarily to large retail chains, specialty retail stores, and distributors. It publishes video games for all the major video game consoles including PS3, Xbox 360, Wii, and others. It also publishes and distributes games for digital platforms such as Xbox Live and PlayStation Network, mobile platforms such as the iOS and Android phones, and online sites such as Facebook (NASDAQ:FB) and Steam. Clearly, 2013 is a transition year in the console business with PS4 and Xbox One ramping, and with mobile- and casino-based gaming small today.

3Q13 likely the bottom (and a low bottom at that!). 3Q13 revenues fell to only $4 million, nearly 60% below consensus of $9 million, and down 56% YOY (ouch!). Further, EPS was ($0.08), and the firm burned about $3.5 million of cash. This is an unpleasant trough to say the least, and presents opportunities for new investors. While burning cash is never a good thing, we are somewhat pleasantly surprised that Majesco's 3Q13 burn was not worse. Beyond this, we expect better results for 4Q13 (Oct) and 1Q14 (Jan), with cash burn rates likely to fall meaningfully for 4Q13, and with Majesco likely to book a profit in 1Q14. Should any new titles be released for 1H14 or even mid-2014 (and if new, exciting titles will not be released then what are Majesco's gaming developers working on?), we think financial results could reaccelerate.

A few rays of hope could drive some new investors to enter. While Majesco's financial results have been bleak, we note a few rays of hope out there that could cause new investors to enter the stock:

  • Strong Q3 video game sales a good sign for 3Q13 and 1Q14. NDP Group reported that U.S. consumers spent $3.5 billion on video game content in 3Q13 (+17% YOY). Some industry analysts even said these are the best sales trends since 2011, and are an indication of some renewed industry health. The recent launches of Microsoft's (NASDAQ:MSFT) Xbox One and the Sony (NYSE:SNE) PS4 should continue to fuel consumer excitement and spending for games heading into the holiday season. While this is more of a plus for firms with titles right now (not really Majesco), there could be a "rising tide lifts all boats" effect.
  • Zumba released in November; early reviews are promising: Majesco released Zumba Fitness World Party in November for Xbox 360, WiiU, Wii, and Xbox One. We would guess that releases for PS4 and Xbox One are forthcoming, but that is pure speculation. The game originally was to be released in 4Q13, which explains some of the near-term revenue weakness. So far customer reviews for Zumba Fitness World Party are promising, and the game even has a five star rating on Amazon.com
  • New gambling venture or mobile efforts could contribute to turnaround. On August 6, Majesco formed a joint venture called "GMS Entertainment" to pursue online casino gambling. The company will invest up to $4.5 million for a 50% interest in the joint venture. Majesco will serve New Jersey casinos as part of this deal, we would guess, among others. Also, Majesco plans to raise $2 million from the sale of 3.3 million shares at $0.60 per share. While it is still very early, we like the fact that Majesco is moving to sensibly enter the huge online gambling market. Majesco is also allocating some resources to its mobile gaming efforts, and could see upside here in coming years. Clearly, management is pursuing a path of reasonable investments that make sense.

Cash on hand, and burn rate, suggest Majesco can make it another year. While a $3.5 million cash burn in F3Q13 is concerning, we think that is the worst of Majesco's performance for the foreseeable future, and with Majesco having enough cash on hand to weather the storm. Regarding its cash burn rate, Majesco management has meaningfully reduced its operating expenses and development costs on a year over basis, and we think breakeven revenues for the firm are now roughly $45 million per year. Given this, Majesco could even see revenues fall slightly year over year and not burn cash in 2014. We do expect Majesco to generate solid cash in F1Q14 (Jan) due to higher holiday sales. Net, we actually think Majesco will roughly maintain its cash position next year, on $45 million of annual sales, with EV/Sales multiples increasing as new investors kick the tires, and with COOL shares a free upside call option here on any solid game title releases. Here is firm's cash position, and remember, we expect positive cash flow generation in 1Q14, and conservatively estimate breakeven cash flow generation trends in 2014:

Figure 1. Majesco's Liquid Assets and Liabilities Show Worst Has Likely Passed

Source: Pinnacle One Research

Shares seem undervalued and improperly discount additional cash burn. We believe that COOL shares are trading at a substantial discount to fair value. The stock only has a market capitalization of $26 million (on forecasted post GMS-deal sharecount), and we forecast liquid cash assets of about $16 million over the next year (or better), implying a roughly $10 million enterprise value, or 0.2 EV/Sales. Gaming companies in the same industry regularly trade at 1x-2x EV/Sales. Even at half the mean, and taking into account some enhanced scale risks with Majesco, COOL shares could still rally up to 0.75x EV/Sales if anything goes right in the next year, or roughly $1.40 per share. This represents more than 130% upside potential from the current price of $0.60 per share, and leads us to believe that shares sport positive risk/reward:

Figure 2. COOL Shares Seem Undervalued If They Maintain Cash Balances

Source: Pinnacle One Research

Net conclusion: COOL shares seem attractive given bad news embedded, lower cost structure, and likelihood of new titles coming in 2014. So, to recap, we think shares of COOL sport attractive risk/reward dynamics with possible upside towards $1.00 per share if any positive developments occur. We have a few main points: (1) shares sport an Enterprise Value of roughly $13 million, or 0.25x EV/Sales, and are discounting no future recovery; (2) the firm has enough cash on hand to sustain it for the next year, in our view, and is not a going concern; (3) Majesco is in a hits-based business, so if any halfway decent title(s) gets launched in 2014, shares will likely head to $1.00; and (4) the firm is migrating some development resources and focus to casino- and mobile-based gaming, more lucrative and growthy sectors. So, in short, while we do not have any specific catalysts identified, we think this company is worth solidly more than $13 million, and that there is a reasonably decent chance that Majesco's gaming developers are working on something new and exciting for 2014.

Disclosure: I am long COOL.

Business relationship disclosure: Business relationship disclosure: The article has been written by Pinnacle One Research's Director of Research. Pinnacle One Research is not receiving compensation for it (other than from Seeking Alpha). Pinnacle One Research has no business relationship with any company whose stock is mentioned in this article.