(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.)
- TigerLogic (TIGR) is a prime example of the disconnect between microcap and large cap companies with similar growth drivers but very different valuations.
- Moreover, the recent sale of a non-core business further strengthened the debt-free balance sheet and enabled TIGR to focus on the faster growing mobile and social media businesses.
- Furthermore, the recent announcement that the largest shareholder is seeking strategic purchasers for its shares may be the catalyst for a sale of the entire company at a significant premium.
TIGR provides data management and application development solutions through the following two product lines:
Omnis Rapid Application Development software is a development platform that allows mobile developers to build and deploy apps across all major operating systems and databases.
The social and mobile platform consists of Postano, Storycode, and yolink. Postano is a real-time social media content aggregation and visualization platform. Storycode provides mobile app publishing. Yolink is a next-generation search enhancement technology.
The journey of a thousand steps...starts with selling a non-core business
The October 2013 sale of its multidimensional database management systems (MDMS) business to Rocket Software for ~$22 million is the latest example of its increasing focus on the faster growing mobile and social media businesses.
As a result, TIGR can grow from a position of financial strength given the lack of debt and $23 million of cash, which will help fund accelerated product development. Moreover, management said on the most recent conference call (MP3 file download alert; no transcript available) that the vast majority of the proceeds will be tax free (there is a non-meaningful amount of alternative minimum tax) due to the ~$44.2 million of NOLs.
The market is ignoring the long growth runway as the small market cap naturally attracts less attention compared to larger and more visible peers such as Facebook and Twitter. However, the small size appears to only be an impediment to a higher valuation if growth is still in its infancy (which it is for TIGR). For example, WhatsApp has 450 million users (and growing ~1 million a day) but only 50 employees.
The valuation for TIGR should increase once growth reaches critical mass in the form of a larger installed base (already at >500,000 active users), which should occur over the next 2-3 years given the secular industry growth and unique value proposition of its products. Over the longer term, there is significant earnings potential due to the highly scalable business model and extremely high gross margins (e.g. 93% for licenses and 81% for services).
Postano should benefit from the ongoing and rapid evolution of branding as it aggregates content across the most popular social media platforms (e.g. Twitter, Tumblr, Facebook, Instagram, Pinterest) and allows for these streams to be moderated, curated, analyzed and displayed in stores, events and websites. This results in much greater customer engagement and brand loyalty.
Postano 2.0 is a SaaS platform that offers the first native mobile moderation apps for iPhone and Android in the industry. An earlier update expanded the mobile capability with the integration of Storycode technology (gained in the December 2012 acquisition of mobile app publishing company Storycode). This allows brands to publish magazine apps to iOS and Android as well as integrate promotions and ads directly into the content stream. Its customers who integrated Postano into their websites and retail spaces are asking it to provide a similar mobile solution.
TIGR can grow not only from the increasing "greenfield" demand but also from stealing market share from traditional and largely ineffective media (e.g. TV, radio, newspapers). For example, spending on mobile ads is projected to reach $18 billion this year and may more than double to $42 billion by 2017, according to Gartner.
Furthermore, Postano can use college sports as a platform for growth, much like Under Armour. Management said that the sports vertical continues to grow and attract new accounts as it allows universities and colleges to create social displays on campuses and in stadiums as well as social hubs for websites all from a single platform. This has a similar positive effect on engagement as students and fans can see their photos, videos and messages displayed on large screens during an event.
Customers are upgrading to the latest version of Omnis in order to take advantage of its mobile features including the ability to create and deploy enterprise apps that can run on virtually any device and on any platform from a single code base. Moreover, management noted the significant growth potential due to the fact that the majority of enterprise data is not stored in the cloud but in disparate databases, which Omnis can connect to natively.
Go big or go home: Why are only large losses rewarded?
Microcap companies in the mobile and social media space can be forgiven for wondering why investors continue to reward some of their much larger and unprofitable peers with stratospheric valuations despite the fact that they should all benefit from the same growth drivers. This is an opportunity for prospective investors as the market arguably has overdiscounted twice*.
On the "high" side the market rewarded Facebook with a higher stock price after it paid $19 billion or 950x revenue for WhatsApp. On the "low" side, TIGR trades near a five year low despite having no debt, cash that represents 47% of the market cap and rapid growth. This value disconnect is compounded as almost every investor has heard of FB while almost no one has heard of TIGR. The argument that larger but unprofitable companies should receive a higher valuation merely because of their greater resources does not apply in this instance given the strong balance sheet.
There are two factors that should reduce the negative impact of the projected continuation of operating losses. First, growth continues to accelerate as revenue from continuing operations rose 61% to $1.4 million in the mrq due to higher revenue from Postano subscriptions and Storycode professional services. Second, the projected increase in sales/marketing and R&D expenses should be offset somewhat by the termination of a revenue sharing agreement in fiscal 2015 (which will reduce the cost of licenses), stable G&A expenses and fewer non-recurring expenses (e.g. transaction expenses of $1.3 million related to MDMS sale; ~$1 million of acquisition and integration expenses for Storycode).
*I am not saying to short FB. This example is given to highlight the long opportunity in TIGR.
If you can't beat 'em, join 'em
The recent announcement that Astoria Capital Partners (where the CEO is also the managing partner), which owns 50% of the stock, is seeking strategic block purchasers for its shares may be the catalyst for a sale of the entire company at a significant premium. This approach is superior to selling blocks piecemeal given that the M&A environment for mobile and social media companies could not get any more favorable. Public companies can use their expensive stock to fund an acquisition while private companies can use their internal cash flow or VC money. Any of its larger competitors (e.g. Google, Facebook, Twitter, Yahoo, Microsoft, AOL) would be natural acquirers.
Even if an acquirer paid a significant premium, it would still be low on an absolute dollar basis given the low EV. A high valuation does not even seem to be a deterrent given the fact that it is quicker and cheaper to "buy vs. build", especially for larger companies facing an existential crisis such an IBM (who plans to spend >$1 billion on cloud software development through 2015). Furthermore, an acquirer would be able to eliminate the significant sales/marketing and G&A expenses, which would reduce the "all in" price even further.
The following are the primary risks to the investment thesis, in order of importance:
- Management expects continued operating losses due to an elevated expense run rate (driven primarily by higher sales/marketing and R&D spending) as growth ramps up.
- Each of its markets is highly competitive (see above for examples of larger competitors) and subject to rapid technological change.
- TIGR will eventually need to replace the revenue from the MDMS business, which represented 44% of total revenue in the mrq, although this resulted in a significant reduction in expenses as well.
The conservative price target of 2.00 should be attainable over the next 12-24 months as growth continues to ramp up. The stop loss should be placed below recent support at ~1.50 or ~6% below.