(Editors' Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.)
MeetMe, Inc. (MEET) is a leading social media site for meeting new people. MeetMe's mobile revenues hit an important inflection point in Q4, accelerating 127% year-over-year. New growth initiatives in 2014 should spur user engagement, potentially accelerating its mobile revenue growth rates to nearly 140%.
MeetMe's inflection point has gone unnoticed to most investors, with the deceleration of its web revenue obfuscating the company's expanding mobile revenue line. This presents a compelling opportunity to discerning investors with a twelve-month time horizon.
In addition to its burgeoning mobile business, the company's web revenues should stabilize in 2014, positioning the company to enjoy a consolidated revenue growth rate of 30% in 2014. With an accelerating top-line, MeetMe's EBITDA line should expand strongly to $8.4 million in 2014.
Currently trading for only 10X our EV/'14 EDITDA estimate, we believe that shares of MeetMe are quite attractive at $2.15. As growth accelerates throughout 2014, we believe new investors will eventually place a low-20s EV/EBITDA multiple on its shares. This would translate into a double from current levels.
Moreover, with $1.00 a share in discounted net operating losses (NOLs) (MeetMe has $130 million in NOLs that most investors are not aware of), we believe that the stock's downside is very limited, especially with its shares now attracting a broad range of new investors, including both value-oriented investors and a new set of digital-oriented growth investors.
Taken together, we believe MeetMe's stock will rise in a step-ladder ascent to $3 by the end of the summer, the mid-to-high $3s by the end of 2014, and to the low-to-mid $4s by next spring.
MeetMe is one of our top ideas for 2014.
MeetMe is a company born of a merger between myYearbook and QuePasa in 2011. Importantly, a new and much-improved management team has been assembled over the past twelve months at MeetMe, one that replaced most of the former QuePasa management team.
An integral component of any investment in a micro-cap name is the strength of its management team. As new shareholders in MeetMe, we have been very impressed with our due diligence interactions with MeetMe's Geoffrey Cook and his revamped management team. Importantly, as one of the largest MeetMe shareholders with an ownership stake of 2.9 million shares, Mr. Cook seems very motivated to:
- Bring MeetMe to a much bigger mainstream audience than today's 1 Million Daily Active Users.
- Increase MeetMe's user base and engagement via the introduction of new standalone apps.
- Grow its mobile revenues strongly.
- Boost MEET's stock price to much higher levels.
To this end, we believe that the proof is already in the pudding, based on a recent pre-release of Q4 results.
Took Some Time, But Mobile Revenue Inflection Point Finally Achieved in Q4
Let's be clear: MeetMe is not an untarnished growth story. We question why the company came public as it did, reverse-merging with QuePasa, a company with a big international user base that was never monetized successfully. While the new company did double its international Daily Active User base, expected synergies between the two companies never materialized, thereby delaying MeetMe's story from blossoming. That is, until now.
From Q1 to Q4 of 2013, MeetMe's mobile revenues grew 155%, from $1.9M to $5.1M:
2013 MeetMe Consolidated/Mobile Revenues
For 2013, MeetMe's mobile revenues grew from $6.1 million to $12.5 million, a 105% growth rate.
Most importantly, note how mobile revenue growth re-accelerated meaningfully from Q3 into Q4:
2012-2013 Quarterly Mobile Advertising Revenues (in millions):
Since pre-releasing this upside surprise in mid-January, MEET's stock has moved up strongly from $1.80 to $2.15. Nonetheless, the stock did not break-out to new highs. We believe there a few reasons for this.
4 Reasons Why MEET Has Not Broken to 52-Week Highs, Yet
We believe there are four reasons why MeetMe's stock has not yet sprinted to new 52-week highs.
1. There is a scarred legacy shareholder base still in the stock, one that goes back to the original QuePasa shareholders. Most of these legacy QuePasa shareholders are down heavily on their positions, dating back to when the stock traded under the symbol, QPSA. These shareholders represent daily resistance in the stock.
With only 38 million shares outstanding, however, new buyers seem very close to overcoming these sellers. In January, the stock had its biggest month ever of accumulation, with 22.6 million shares traded.
2. Secondly, new institutional investors have most likely only initiated partial positions in the stock due to an overhang from the S-3 filed by the company in the fall.
While a near-term secondary is certainly a consideration investors should be mindful of, we believe that a secondary would actually be a strong catalyst for the stock, with new analyst coverage certain to follow any deal. According to our industry contacts, a number of investment banks are currently courting MeetMe.
With the stock cheap on many levels, it would not surprise us to see the company wait to raise money until its stock is in the high-$2s, or above $3. This is just a guess on our part - we have knowledge of neither the timing nor potential price considerations to any secondary offering.
3. Perhaps the most important reason why the stock has not yet moved dramatically higher is due to the company's flat Daily Active User base on mobile since late 2012:
MeetMe's Mobile Daily Active Users (DAU)
Source: MeetMe Investor Presentation
Based on the strength seen in Q4's top-line, however, we believe that the company's Mobile DAU most likely turned higher last quarter. Moreover, a number of new initiatives should, at the very latest, turn this metric upwards in the current quarter.
4. Finally, the current market downturn has lowered risk appetite levels in the very near-term. We believe this is an opportunity for more patient investors, in light of a number of new growth initiatives.
New Standalone Apps Should Reinvigorate Mobile Daily Active Users
During last week's conference call with Facebook investors, Mark Zuckerberg stated that the company "will build a handful of great new experiences that are separate from what you think of as Facebook today."
We were delighted to hear this strategy, as it validates the approach Mr. Cook has been spearheading at MeetMe over the past nine months. Mr. Cook expounded upon the importance of standalone apps in a very insightful blog post late last year.
Working under the assumption that engagement, retention, and viral growth will spur increased Mobile DAU, MeetMe has already launched its own standalone app strategy with three new apps designed to "deepen and facilitate connections" amongst users: Charm, Choosy, and Unsaid.
By cross-promoting all of these apps together, we believe that MeetMe will be successful at generating user growth on the new apps. Additionally, the new apps should prove to be an inexpensive proving ground for features on the core app.
While it is still too early to judge if one of these standalone apps could be a big winner for MeetMe, early results look promising:
- Last Thursday, MeetMe announced that Charm was ranked the number 41 app in the Social category of the Google Play Store. Charm is a video app which the company has only begun to promote to its MeetMe user base on Android. Since its launch, Charm has facilitated 100,000 matches and sent more than 700,000 messages.
- On January 13th, MeetMe announced that Choosy, its people discovery application, ranked as the number 29 overall app in the Social category on the Google Play Store.
We believe that MeetMe's introduction of these new standalone apps will spur user engagement and drive viral growth. MeetMe has a strong track record of driving dramatic increases in traffic as a direct result of new product launches. We are therefore bullish on what effect these new standalone apps could have for the company's mobile growth rates in 2014.
Looking ahead to March, MeetMe will be launching its biggest update ever to the MeetMe app. A new address book feature could incentivize its existing user base via virtual currencies to recruit their contacts. If this strategy works out, this could be an important catalyst for its mobile growth rate and, in turn, for MeetMe's stock.
MEET's Mobile ARPDAU Accelerating Strongly - Compares Very Well with Facebook's Mobile ARPDAU
Assuming the company is successful in adding new users and in engaging existing users throughout 2014, this should translate into accelerating top-line mobile growth for the company.
Interestingly enough, MeetMe has already been successfully monetizing its existing mobile user base. The best metric for measuring this monetization is via Mobile ARPDAU, which stands for Mobile Average Revenue per Daily Active User. We believe most investors are unaware of how much progress MeetMe has made on this metric over the past few quarters.
In the company's recent investor presentation at the Needham conference, the company notes that this metric has not only turned upward, but it has also begun driving towards parity to web rates:
MeetMe Mobile ARPDAU
Source: MeetMe January Investor Presentation
In light of the increased engagement of mobile users, which drives higher virtual currency purchases and higher advertising impressions and ad clicks, we see no reason why Mobile ARPDAU cannot reach or even eventually exceed Web ARPDAU.
Although the company did not provide any metrics on Q4's Mobile ARPDAU, Northland's savvy analyst, Darren Aftahi anticipates a significant sequential rise in MeetMe's mobile ARPDAU to almost $0.07, a dramatic 68% acceleration from Q3. A quick excerpt from Aftahi's recent update for MEET investors:
"We believe the key metric to comparatively monitor the two companies on is mobile average revenue per daily active user (or mobile ARPDAU), or essentially the monetization per mobile daily active user(DAU). While by our calculations, FB's mobile ARPDAU improved ~28% q/q, from $0.019 to $0.025, respectively, it still lags the implied figure from MEET's pre-announced 4Q results, or $0.069, up ~68% q/q.
With superior mobile monetization metrics, we maintain our thesis that MEET is an undervalued pure-play mobile ad growth story in the social media space that monetizes mobile users ~180% better than FB, but trades at a relative market value/mobile user discount of ~59%."
Aftahi also provided a compelling comparison to how well MeetMe is monetizing its mobile base vs. Facebook:
While certainly difficult to put MeetMe in the same conversation with Facebook, we are nonetheless impressed with the company's initial mobile monetization efforts and its diversified mobile revenue stream which consists of mobile advertising revenues, virtual currency, and also social games, which are used as a means to meet new people.
Looking ahead to 2014, we are very bullish about these monetization efforts gaining further traction. A large part of our bullishness is a result of MeetMe's recently announced partnership with PinSight Media+, Sprint's new ad exchange.
Pinsight Deal Will Accelerate Both Mobile CPMs and Mobile Advertising Revenue Growth Rate
In late November, MeetMe entered into a contract with Pinsight Media+, under which it agreed to sell its mobile advertising inventory to Pinsight Media+ at higher guaranteed CPMs through 2014. Here is what MeetMe's Chief Revenue Officer, Bill Alena, had to say about the deal:
"The Pinsight Media+ agreement reflects our unique market position, favorable user demographics, and our strong advertising units. With this agreement in place, we believe our mobile ad rates will be significantly better on average than in 2013, and will form a strong foundation for our long-term growth strategy."
At the Needham Growth Conference, Mr. Cook commented that if the Pinsight deal had been in place throughout 2013, an incremental $4.1 million in mobile advertising revenues would have been realized for the company. While this is certainly an impressive extrapolation, we believe this figure actually understates the contributions Pinsight will make to MeetMe's mobile revenues in 2014.
Investors should note that MeetMe's native feed ad product was not in full swing until April of 2013. Given that MeetMe generated only 100 million impressions a month in Q2, and then jumped to almost 400 million a month in Q3, it is reasonable to assume the majority of the $4.1 million in theoretical Pinsight revenues would have been realized in the second half of the year.
If we take this one step further, this revenue bump could have potentially translated into the company exiting 2013 at a quarterly mobile revenue run rate of $7-$7.5M as opposed to the $5.1M MeetMe actually achieved in Q4. Even after taking into account the typical seasonality seen in advertising in Q1, we believe MeetMe may post another significant beat on its mobile revenues this quarter, setting the stage for higher estimate revisions as early as this spring.
If we are correct in these assumptions, the current 2014 estimates for MeetMe appear to be almost 20% too low. Moreover, with the existing leverage in the company's expense line, the majority of these incremental revenues should fall to the bottom line.
Although the Pinsight deal is initially set for one year, this is actually ideal for MeetMe. Mobile trends suggest CPM rates should rise strongly in 2014, leading us to believe MeetMe will have the upper hand in negotiations with Pinsight for 2015, or perhaps, even more established mobile ad exchanges.
In September 2013, MeetMe announced an agreement with Beanstock Media, under which Beanstock would purchase most of the company's remnant web-based ad inventory at attractive rates. Web CPMs seem to have lifted in Q4, helping to stem the year-over-year decline in web revenues.
After declining 22% in 2013, we believe the deal with Beanstock will enable MeetMe to stabilize its web revenues in 2014. Although we still expect web revenues to decline year-over-year, we believe the rate of decline will slow, creating an opportunity for MeetMe's legacy revenue line to surprise to the upside in 2014.
IPI 2014 Model
Taken together, we believe MeetMe's consolidated revenue line will grow by 30% in 2014, almost double the current sales growth estimates of 16.34%. See the IPI estimates (in yellow) versus the current estimates (in pink) below:
IPI 2014 Consolidated MeetMe Revenue Model
Source: Inflection Point Investing LLC & Northland Capital Markets
Because MeetMe is under-followed by the Street, covered only by Northland Capital Markets and Emerging Growth Equities, any revenue surprise to the upside in 2014 could result in a significant move higher for the stock.
In light of the numerous growth initiatives poised to unfold in its mobile business this year, we believe MeetMe can grow its mobile revenues by 140% in 2014. While Northland is currently modeling a 90% mobile growth rate, with $23.7 million in revenues, we believe $30 million is achievable.
A 30% increase in overall revenues should allow MeetMe to grow its EBITDA margin in 2014 to 16%, translating to $8.3-$8.6M in EBITDA on the income statement. At the current time, Northland is looking for $7.4M in EBITDA in 2014.
While our bullish thesis obviously revolves around MeetMe's numerous growth prospects in 2014, at current levels, we also believe MeetMe stock offers one of the most compelling risk/reward opportunities we have discovered in the market. This is because MeetMe boasts a valuable hidden asset on its balance sheet, which should ensure minimal downside to the shares.
$1 in Discounted NOLs a Hidden Asset on Balance Sheet
Due to the complexities of merging QuePasa and myYearbook's respective operations into one company, MeetMe's 2012 10K is very messy.
In Note 15 on page F-27 of the 10k, the company quietly highlights what we believe to be a hidden asset on its balance sheet - over $130 million in NOLs:
At December 31, 2012, the Company had net operating loss carryforwards of approximately $130,867,000 related to U.S. federal and state jurisdictions. Utilization of the net operating loss carryforwards, which expire at various times starting in 2013 through 2032, may be subject to certain limitations under Section 382 of the Internal Revenue Code, as amended, and other limitations under state and foreign tax laws. The Company believes its tax positions are all highly certain of being upheld upon examination. As such, the Company has not recorded a liability for unrecognized tax benefits. As of December 31, 2012, tax years 2009, 2010, and 2011 remain open for IRS audit. The Company has received no notice of audit from the Internal Revenue Service for any of the open tax years.
While we never base upside assumptions on a company's large NOL assets, in a turnaround story with accelerating fundamentals, large NOLs will often attract value-oriented investors.
In the case of MeetMe, we believe this substantial carry-forward NOL asset should help act as a buffer for the shares on the downside if this market pullback becomes protracted in the coming months. We like that downside protection.
Shorts Retreat From MeetMe
Maintaining a healthy respect for the bear case on any of our holdings helps to ensure we do not fall in love with any particular stock. However, it is always encouraging to see the shorts beat a hasty retreat from any of the names in our portfolio.
To this end, after peaking on November 29, 2013, note how the short interest in MeetMe has declined by 17.5% in the past two months:
MeetMe Short Interest
In particular, we are encouraged to see the highest percentage drop in the short interest occurred in the period which coincided with MeetMe's Q4 pre-release on January 8, 2014. When the shorts begin exiting a name in more aggressive numbers, this is often a bullish development - especially in a name that is bottoming.
Investors should always weigh the potential risks to all their equity investments. MeetMe is certainly no exception. With this in mind, potential MeetMe investors should know there are number of risks to our bullish thesis.
1. There is no guarantee MeetMe's web business will stabilize as we have forecast for the year. If the web business continues to decline, our 2014 assumptions could end up being too high.
2. Mobile ARPDAU and Mobile DAU metrics may not turn higher as expected if MeetMe's standalone app strategy does not lead to new user acquisition or increased monetization efforts within the existing user base.
3. The 1-year contract with Pinsight may not translate into renewed business with the company. There is also no guarantee MeetMe will be able to lock-in the anticipated higher CPM rates or be successful in finding new partners in 2015.
4. Another risk to be mindful of is litigation risk. On Monday, February 3, a lawsuit was filed in San Francisco against MeetMe in regards to its "privacy protections and publication of minors' profiles, photos and location data."
While we were impressed with MeetMe's response to these allegations, there is no guarantee this lawsuit, or future law suits, will not create a distraction for the management team.
5. MeetMe is a micro-cap stock that has yet to find its footing. If a bear market were to ensue, our upside objectives may be suppressed as market participants become more risk-averse.
Having noted the risks accompanying an investment in the stock, we believe MeetMe's 2014 roadmap is very clear. Whereas 2013 was about building its mobile monetization efforts, in 2014, the company's objective is all about filling that funnel. We believe the company will be successful in growing its Mobile Daily Active User base and in engaging new users this year. In turn, this will increase the amount of mobile impressions the company will be able to generate and sell to Pinsight, setting the stage for a continued acceleration in mobile revenues.
While we are basing our price projections for a year from now on an EV/EBITDA multiple in the low 20s (vs. mid-to-high 20s for larger comps - see below), we believe many investors will eventually come to value MeetMe on a price-to-sales basis, as is done with larger social media companies.
It seems reasonable to model almost $30 million in mobile revenues for 2014 and low $40s for 2015. As new investors get excited by the ramp in mobile revenues in 2014-2015, we believe that MeetMe will grow into a 4x sales multiple during the next 12 months.
A 4x forward sales multiple would still be a 50%+ discount to much larger social media names like Facebook (FB), LinkedIn (LNKD), and Twitter (TWTR). Take a look at the EV/revenue comps in yellow on our model below:
Source: Inflection Point Investing & Yahoo! Finance
IPO activity is another catalyst that could help propel MeetMe's shares higher in 2014. We expect Zoosk to launch its IPO this year and there is also the potential for Match.com to be spun off by IAC/Interactive Corp. While these are traditional dating sites, we believe the similarities are close enough to attract like-minded investors who may find MeetMe's relative low valuation compelling, assuming Zoosk's IPO prices at lofty levels.
Furthermore, MeetMe enjoys much higher engagement levels from its users than either Match.com or Zoosk. With its Mobile Daily Active Users logging in 100x a month, this level of engagement should eventually translate into a meaningful advertising business for MeetMe, one which will get re-valued higher by the market over time.
As it becomes clear to the market that 30% consolidated year-over-year revenue growth is achievable for this year, along with a 16% EBITDA margin, we believe shares will see steady gains throughout 2014. Considering that MeetMe will be appearing at the JMP and Roth conferences in early March, the potential for new investors to enter the name is very high.
It appears some new investors already agree with our bullish projections.
A look at the 3-year, weekly chart reveals steady accumulation in MeetMe shares since the company pre-released its Q4 earnings on January 8th:
MEET 3-Year, Weekly Chart
Source: TD Ameritrade IP Company, Inc.
Once the $2.40-$2.50 levels are taken out, shares should begin to stair-step higher, on their eventual path to $4 and change.
With all of the aforementioned catalysts expected to play out, MeetMe is one of our highest conviction names for 2014.