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Summary

  • MGT reported second quarter earnings that showed substantial improvement over 2013.
  • I fear it may be too little too late as the company's share price has shaved over 2/3 off its value since I recommended it.
  • The company failed to execute on its plans that caused me to opine on the stock last year.
  • The stock would need to triple to be back to where I made the call.
  • I own up to the fact that this is the worst buy call of my career.

After a rough run into 2014, MGT Technology (NYSEMKT:MGT) just reported its second quarter earnings. It was an interesting quarter that saw the acquisition of draftday.com, the launch of mgtplay.com, tweaks to the vegasinsider.com fantasy sports platform and a launch of a fantasy news site called fantasysportslive.com. Now how did the company do earnings wise? Well, revenues were up nearly five-fold year-over-year, coming in at $320,000 in its second quarter compared to $67,000 in its comparable 2013 quarter. Gross margin was up to $153,000 (up from $47,000 last year) while at the same time operating expenses came down a whopping 47% year-over-year to $1.7 million. Obviously the company is still losing cash with these numbers, and operating loss was about $1.5 million. This is half of the 2013 losses in the second quarter of $3.1 million. So things are moving in a better direction for the company.

When I recommended a buy on the stock as a speculative way to play the online gaming space, specifically online poker, the stock was trading at $2.51. I felt that the acquisition strategy the company outlined was going to be executed, despite management's track record at that time for hurting shareholder value. What struck me as a catalyst was the company's plans to acquire websites in the gaming space. It seemed sound. I was particularly excited about the real deal poker transaction stating:

"MGT announced that its majority owned subsidiary, MGT Interactive, had acquired certain assets from Gioia Systems LLC, which is the pioneer and intellectual property holder of a revolutionary card shuffling technology for the online poker market. MGT acquired all of the assets related to the technology as well as the patents associated with the shuffling machine technology known as "Real Deal Poker". According to the technology's description the machine accurately mimics real life shuffling. No more "random assignment shuffling" which hackers have shown on numerous occasions have known and predictable patterns….The potential market for online poker is huge. With the Real Deal Poker shuffling technology, a fair and completely random deal is assured. This should draw brick and mortar casino gamblers back to online poker. Online poker is huge in Canada and in the UK. Once the US is on board, the revenue streams to MGT cannot be understated"

I could not have been more shortsighted here. I figured this would be a high demand source of revenue, but the fate of online poker is questionable at best in the US and there is stiff competition. After losing more cash and readjusting their strategy, management has presided over a company whose stock has dropped from $2.51 when I recommended it down to a penny stock status of $0.87. This is good for a devastating loss of 66%, making it one of the worst calls I have made in my career. While the company is turning things around very slowly, and may be poised for longer term growth after coming up over 30% off of its lows of $0.62, I can no longer stay behind this name. I was wrong. My thesis on the company has not panned as of yet into 2014, and even if it does the stock will need to triple in order to break even. This is was not my proudest moment and I am owning up to the fact that this call was atrocious. I owe you that at the least, particularly if you invested in my thesis.

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.

Source: Update: MGT Technology's Q2 Earnings - Owning Up To The Worst Call Of My Career