- RMG Networks is an under the radar company in transition which recently lost over 70% of market value.
- The company is currently in the early stages of a new business strategy and investors may want to discount Q1 earnings as being "too soon to judge".
- The current risk vs reward potential is greatly skewed in favor of investors.
RMG (NASDAQ:RMGN) is a company you most likely never heard of and is very clearly underfollowed. It only has 24 holders of record and average volume of under 10,000 shares a day. Frankly, it only came across my radar yesterday too when the stock traded 3.25 million shares and fell by ~70% to under $1 a share.
I'd like to share with you my quick and dirty analysis on why I believe the stock at these levels could be a worthwhile speculative investment for an investor with a high risk tolerance.
RMG Networks is the global leader in intelligent digital signage solutions, providing digital signage media solutions, hardware, software and services to nearly 70% of the Fortune 500.
The company has two main segments: Media which is involved in partnering with airlines and malls which have digital screens and selling advertising for them and Enterprise which is involved in creating custom made digital signs for all types of business.
The current form of RMG is less than a year old and is a roll-up of other digital signage businesses that were purchased through a SPAC which you can read about here. Insiders currently own over 50% of the shares outstanding.
The primary reason for the stock collapse yesterday seems to have been driven by a seemingly abysmal Q1 earnings report and a somewhat evasive earnings call.
Revenues in the media segment were down over 50% while total company revenue was down 16%. On the conference call management explained the decline to be primarily related to advertisers choosing to devote advertising budgets towards the Olympics and a change in strategy whereby last year the company chose to sell full year advertising plans at a discount at the beginning of the year, this year they plan to sell more ad space at market rates which will hopefully lead to higher margins.
They reiterated that total revenues should grow organically by 20+% y/y primarily driven by the enterprise (higher margin) segment even with this Q1 decline.
The company posted a horrible net loss of $12.4m for the quarter. This includes $1.9m of D&A, $4.6m of change in warranty liability. (The company adjusts in its EBITDA stock based compensation - but I think it is best to keep it in.) This brings negative cash flow in Q1 to around $5.9m minus another $1.2m for Capex.
It's important to note that warranty expense is just a change in fair value of its outstanding warrants - which are currently so far out of the money (strike price of $11.5m) that I believe they can be ignored in current analysis.
The company mentioned that Q1 is also historically its weakest quarter.
Here is the investment thesis: The stock is currently trading at a market cap of $11.5m and an enterprise value of around $15m.
The company currently has exclusive deals with some of the largest airlines in the world such as Delta and United and has a track record of continually adding new partnerships. The company's new strategy to roll-up digital signage makes sense to me in terms of cross selling opportunities and economies of scale. The business makes sense but management is being judged on the first inning while there is still a long way to go.
I understand investors' frustrations and this quarter was definitely not pretty. I imagine a large investor decided to just liquidate their entire position on Thursday out of frustration. I don't believe though that management has been given enough time to prove itself.
There is a lot of upside potential for the company while the most you can lose is the full value of your investment.
I believe the risk of bankruptcy/dilution definitely looms with cash sitting at under $5m but I think the odds are stacked in your favor.
This is definitely a speculative investment considering the lack of market liquidity and ongoing cash losses. As with all teenie cap stocks - please do your own research and don't rely solely on an article like this.
Editor's Note: This article covers one or more stocks 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.