Zoosk And TrueCar IPOs Ready To Show How Undervalued Keating Capital Shares Are

May.16.14 | About: Crossroads Capital, (XRDC)

Summary

Company trades below net asset value.

TrueCar and Zoosk IPOs in spotlight, with possible valuation increases overnight.

Other portfolio companies eyeing upcoming IPOs.

Strong capital return plan that yielded over 8% in 2013 and looks strong for 2014.

Sale of Millenial Media stake will free up cash for future investments.

At the end of 2013, Keating Capital (KIPO) reported net asset value of $7.65 per share. While that amount has now declined, the core reasons to own shares remains in place. Upcoming IPOs for several portfolio companies offers a great catalyst for investors to get behind this company.

When asked for several bullet point highlights to sell Keating as an investment to clients, the company provided the following:

· 8% dividend yield in 2013

· 25% discount to net asset value

· Several portfolio company IPOs coming in the second and third quarters of 2014

· Majority of IPOs or sales take place in four to eight quarters after initial investment

It is the third bullet point that is the focus of this article. Both TrueCar (NASDAQ:TRUE) and Zoosk (Pending:ZSK), two Keating portfolio companies, have announced IPO plans that will put this company into focus. Other portfolio companies have also been rumored and could make official announcements anytime.

TrueCar had over 400,000 transactions in 2013 and accounted for 2.3% of all new car sales in the United States during the year. Since 2005, the company has helped facilitate 1.2 million automotive deals. In 2013, TrueCar had revenue of $134.0 million, strong growth from the $79.9 million seen in 2012. The most recent reported quarter saw revenue of $43.9 million and a net loss of $9.9 million. With a mid-point IPO of $13, TrueCar will have a market capitalization of more than $1 billion.

In 2011, Keating invested $3 million in TrueCar in return for 566,037 common shares. That investment was valued at $3.7 million in April, but could be worth double that with shares likely to price in the $12 to $14 range.

Zoosk announced plans for $100 million IPO, although it will likely change that amount. In 2013, Zoosk saw revenue increase 63% to $178.2 million. The company reported a net loss of $2.6 million, an 87% improvement from the prior year.

Zoosk has seen its online dating business grow substantially. The company reported a 44% increase in membership in the last year and is said to make up 8% of the U.S. dating market. More impressive, Zoosk sees 62% of its membership come from international markets. International customers made up 49% of revenue last year. A virtual currency used by Zoosk that can get members better noticed by potential matches, made up 13% of total 2013 revenue.

Zoosk combines social networking with online dating, two hot growth markets. The company counts 26 million members in 80 countries. That number includes 650,000 paying subscribers. Zoosk revenue has almost doubled since 2011. Here is a look at financials:

 

2011

2012

2013

Revenue

$97.2 million

$109.1 million

$178.2 million

Subscription Rev.

$94.5 million

$103.8 million

$153.9 million

VCurrency Rev

$2.7 million

$5.4 million

$24.4 million

Members

11.6 million

18.2 million

26.4 million

Click to enlarge

In 2012, Keating Capital made a $3 million investment in Zoosk. That investment got Keating 715,171 Series E convertible preferred shares. Zoosk has not announced pricing of its shares, but the value of Keating's stake should be well ahead of the reported $5.6 million from April.

Metabolon, a diagnostic company partially owned by Keating Capital, is also exploring its IPO options, according to sources. The company signed a new deal with a partner in Mexico for its Prostarix prostate cancer test. In 2013, the company saw $25 million in revenue. A new partnership with Human Longevity has also put the company in the spotlight.

Keating Capital is a pre-IPO investment company that invests during early rounds of funding for startups. The company targets a return of 100% over a four year period. Over four years, Keating expects portfolio companies to go public or become acquired. The current investment criteria for Keating is:

· Annual revenue $20 million (trailing revenue $12 million)

· IPO timing of two years

· Targeted return of 2x investment over four year period.

Keating Capital invested the majority of its capital in 2010 through 2012, making up the majority of its current portfolio. In 2010, Keating invested in four companies. The years 2011 and 2012 saw investments of 10 and 6 respectively. In 2013, Keating Capital invested in only one company.

Here is a look at the entire portfolio of Keating Capital:

· Agilyx: alternative energy, recycle to waste

· Bright Source: solar energy, proprietary solar thermal tower technology

· Deem: e-commerce

· Glam Media: online media centered on lifestyle, entertainment, home, health, food, and parenting

· Harvest Power: organic waste conversion

· Kabam: free to play video games

· Livescribe: mobile, paper-based computing platform

· MBA Polymers: manufacturer recycled plastics

· Metabolon: molecular diagnostics

· Millenial Media (NYSE:MM): digital advertising

· Silk Road Inc.: cloud based social talent software, human resources

· Stoke: equipment manufacturing mobile communications

· Suniva: solar energy

· Tremor Video (NYSE:TRMR): video advertising

· TrueCar: automotive pricing and information

· Xtime: web scheduling and customer relation solutions for automotive industry

· Zoosk: online dating website and application

At the end of the first quarter, this is how the valuations looked for Keating's investments:

                               
                             

Unrealized

                             

Appreciation

Portfolio Company

   

Cost

   

Value

   

(Depreciation)

                               
 

Xtime, Inc.

   

$

3,000,000

   

$

5,950,000

   

$

2,950,000

 
 

SilkRoad, Inc.

     

6,048,667

     

8,748,667

     

2,700,000

 
 

Zoosk, Inc.

     

2,999,999

     

5,560,000

     

2,560,001

 
 

Metabolon, Inc.

     

4,000,000

     

6,140,000

     

2,140,000

 
 

Millennial Media, Inc.

     

3,333,332

     

5,066,115

     

1,732,783

 
 

Glam Media, Inc.

     

4,999,999

     

5,750,000

     

750,001

 
 

TrueCar, Inc.

     

2,999,996

     

3,720,000

     

720,004

 
 

Kabam, Inc.

     

1,328,860

     

1,770,000

     

441,140

 
 

Harvest Power, Inc.

     

2,499,999

     

2,550,000

     

50,001

 
 

Deem, Inc.

     

3,000,000

     

3,000,000

     

-

 
 

MBA Polymers, Inc.

     

2,000,000

     

1,570,000

     

(430,000

)

 

Livescribe, Inc.

     

606,187

     

-

     

(606,187

)

 

Suniva, Inc.

     

2,500,007

     

1,620,000

     

(880,007

)

 

BrightSource Energy, Inc.

     

3,116,852

     

1,779,721

     

(1,337,131

)

 

Tremor Video, Inc.

     

4,000,001

     

2,471,996

     

(1,528,005

)

 

Stoke, Inc.

     

3,500,000

     

790,000

     

(2,710,000

)

 

Agilyx Corporation

     

4,132,976

     

1,230,000

     

(2,902,976

)

                               

Total

       

$

54,066,875

   

$

57,716,499

   

$

3,649,624

 
                               
Click to enlarge

That chart of course ranks the company's investments by their overall gains. It might be more valuable to look at how the portfolio components rank in terms of assets. Here is the portfolio listed by net asset value (in millions):

· SilkRoad Inc. $8.75

· Metabolon $6.14

· Xtime $5.95

· Glam Media $5.75

· Zoosk $5.56

· Millenial Media $5.07

· TrueCar $3.72

· Deem $3.00

· Harvest Power $2.55

· Tremor Video $2.47

· BrightSource Energy $1.78

· Kabam $1.77

· Suniva $1.62

· MBA Polymers $1.57

· Agilyx Corporation $1.23

· Stoke $0.79

· Livescribe $0

As you can see, both Zoosk and TrueCar appear in the top seven investments. Together, the two companies make up $9.28 million in assets, or 16% of the portfolio. When taking cash into account, the two companies represent 13% of the total net asset value of Keating Capital. If investors add in Metabolon, who might also go public soon, a total of 22% of the net asset value of the company is ready to hit the public market.

The company's largest holding SilkRoad has also been a rumored IPO possibility. In 2013, Reuters reported the company had hired banks for an IPO. The company, which competes with Oracle, SAP, and others, is an end to end HR solution company. Keating has funded the company twice and was joined by Intel Capital in both of those rounds.

SilkRoad has seen its value jump for Keating Capital, but an IPO similar to Workday could dramatically increase the value for this largest holding. The company is growing its international presence and now has offices in the United States, Canada, China, Australia, Singapore, New Zealand, Germany, France, United Kingdom, Denmark, Japan, and the Philippines. Several of those offices cover large areas like Central Europe, Western Europe, Northern Europe, and the Nordic region.

SilkRoad has seen funding of $178 million, including $16 million in an August 2013 round. A new CEO took over in 2013 and has experience growing business. John Shackleton ran OpenText Corporation (NASDAQ:OTEX), which now has a market capitalization of $5.7 billion. Under Shackleton's lead, OpenText grew sales from $60 million to $1 billion.

Glam Media raised $25 million recently in what might have been its last round before going the IPO route. Keating led the round, where the company was valued at $750 million. In December, Glam Media was listed as a top ten website company with 126.9 million monthly visitors. Glam ranked number one in style, parenting, and number three in food. The company has seen annual revenue soar above $100 million.

Kabam, a free to play game company, is another IPO candidate and promises that King Digital (BATS:KING) disastrous IPO hasn't hurt its options. The company was worth $700 million back in July of 2013, based on the sale of employee stock. The company's popular game Kingdoms of Camelot has grown to 200 million users in four years. More than a one hit wonder, seven of the company's titles bring in $1 million or more in monthly profits.

Kabam acquired rival Phoenix Age, maker of Underworld Empire and Castle Age. A third game is in development for Phoenix Age. Kabam has now made seven acquisitions and appears to be headed for more, citing Phoenix Age as the "first acquisition in 2014". An IPO is also possible as the company said, "The board is seriously considering it. Have been for about a year."

Kabam recently hired Chris Petrovic, a former GameStop executive, to run the company's mergers and acquisitions. Kabam continues to expand and also has strong partnership with Hollywood studios, helping create games based on The Hobbit and Fast & the Furious. In 2013, revenue increased 100% to $360 million. In 2014, Kabam expects revenue to hit $550 million. A valuation of $700 million seen in 2013 is likely to increase on new funding or an IPO, sending Keating's valuation of its share much higher. Keating Capital is one of several investors on a list that also includes Google Ventures, Warner Brothers, MGMG, and Intel.

Keating Capital has been successful at investing in pre-IPO companies. Former holdings include LifeLok, Solazyme, and NeoPhotonics. LifeLock had a return of 74% for Keating Capital, while Solazyme saw an increase of 22%. The recent declines in Millenial Media and Tremor Video come after seeing initial gains, followed by slight depreciation now.

In fact, Millenial Media continues to be a catalyst for Keating Capital. The company is selling its stake in the company, which will bring in net gains and provide capital that can be used for additional investments in 2014. In the first quarter, Keating sold 415,964 shares of Millenial for $3.0 million. A gain of $1.3 million was recognized from the sale. Keating Capital has a cost basis of $4.01 per share of Millenial. On May 5th, another portion (696,735) of Keating's Millenial shares become eligible for sale. The additional shares (135,194) become eligible for sale around November 1st 2014. Millenial shares currently sell for $3.84, representing a small loss for Keating Capital.

One of the big reasons to own shares of Keating Capital, along with its potential growth from IPOs, is its capital return plan. The company paid $0.49 in dividends during 2013. In 2014, Keating expects to make $0.10 payments for the first three quarters, with an unannounced amount for quarter number four.

Shares of Keating Capital trade for $6.26 at the time of writing. Over the last fifty two weeks, shares have traded in a range of $5.81 to $8.05. I believe the upcoming IPOs will increase the net asset value of the company and in tandem increase the share price for Keating Capital. A new 52 week high could be achieved if both Zoosk and TrueCar have successful IPOs.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in KIPO over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.