We have been following the LiveDeal (NASDAQ:LIVE) saga for some time. Other writers have written extremely detailed pieces recently (see here) so we will not review the basics of why we feel this company is likely overvalued for its prospects. In general, our research led us to believe that the company was unlikely to ever be able to grow into its current market valuation.
But we are always looking for a catalyst that would prove us wrong. Therefore, when a little more than one week ago we saw the company announce the following we were very curious:
NEW YORK, NY--(Marketwired - Apr 29, 2014) - LiveDeal, Inc. [NASDAQ: LIVE] which operates www.livedeal.com, a unique real-time online/mobile deal engine in the $660 billion dining industry, is about to stretch its legs and expand the company's deal platform into the retail sales industry. LiveDeal announced this week that it will be expanding its platform to now include products and services.
Anyone who has followed Groupon at all knows this is where the deal giant makes the bulk of its revenues, and one can only surmise that LiveDeal, too, will enjoy a dramatic increase in revenue growth with this expansion. LINK
Seeing such a strongly worded news release, about a new acquisition surprised us. So thereafter we searched for information about this company, but since it wasn't public, the acquisition target DealTicker.com remained a bit of a mystery to us. But very positive PR continued to come out from the company:
NEW YORK, NY--(Marketwired - May 7, 2014) - LiveDeal, Inc. [NASDAQ: LIVE] makes it official, and with this week's announced acquisition of DealTicker, the company will now offer discounted products and services in the US and Canada. The acquisition will expand LiveDeal beyond solely offering restaurant owners a platform to publish real-time, instant deals on www.livedeal.com. And, with expansion comes added revenues, so acquiring a site that has an established presence should help to drive significant percentage growth for LiveDeal and its shareholders.
Although DealTicker provides LiveDeal with an additional base of consumers that should help grow its audience on livedeal.com expect to see the company being as aggressive in growing the products and services user-base as it has been in the $660 billion dining industry with livedeal.com. With its restaurant deals platform now in 35 major US cities, shareholders should see that number grow soon with what should be so many more new eyes on the company. LINK
Considering the optimistic tone in the previous press release regarding this acquisition, we began to hypothesize the potential value for this new deal. Clearly the company was suggesting this new acquisition would be a significant and material business transaction. Currently supporting around a 50 Million dollar market capitalization, we would assume any acquisition that "would drive significant percentage growth" would deserve a significant price. At the time of the press release the company didn't disclose the acquisition price.
On May 7th, 2014 the company submitted the 8-K pertaining to the acquisition. We were surprised that this single 8-K contained not one, but two "red flags" that deserved further analysis. Considering the optimistic tone in the previous press releases regarding this significant acquisition for the company, we assumed the price of the deal would be in the $2 to $5 Million range. According to the published 8-K, the purchase price for DealTicker was a paltry $246,000 Canadian dollars (U.S. conversion price of approximately $225,000). How could a company with nearly $50 million market capitalization complete a $225,000 USD transaction that materially alters the company's future growth prospects? No matter what multiple we assigned to the acquisition price, even below 1 times sales, it was really impossible in our calculations for this acquisition to either materially diversify the company or change its overvaluation.
In addition to that revealing piece of information from the 8-K, the company also disclosed another potential red flag for investors.
On May 6, 2014, LiveDeal, Inc. (the "Company") dismissed Kabani & Company, Inc. ("Kabani") as its independent registered public accounting firm and approved the engagement of Anton & Chia, LLP ("Anton") to replace Kabani as its independent accountant. Both actions were approved by the Company's Audit Committee.
No investor likes to see this kind of action, and while such a news item is in no way indicative of wrongdoing, anyone long the stock would probably prefer not to have the auditor replaced simultaneously with an acquisition.
LiveDeal continues to sell at a very high valuation, in excess of 20x TTM sales. While the company is certainly attempting to grow, we still have not seen signs that we believe will allow the company to sustain that aggressive growth valuation, especially given recent decreases in risk appetites in the technology markets. Neither of these recent events changes that opinion.
Disclosure: I am short LIVE. 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. Our existing positions mentioned in this article may change at any time. This article is not a solicitation to participate in any of Volte-Face's strategies or funds. Volte-Face Investments does not accept clients nor is it soliciting readers to buy or sell any equity. This article is provided as an opinion on current information and explanation solely of our own reasoning, none of which is guaranteed.
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