A recent penny stock that spent years constantly reinventing itself in a desperate attempt to merely survive, Mandalay may have just pulled off its most impressive transformation yet. Suddenly worth more than $200 million - before clearing its first dime - Mandalay has practically doubled in value over the course of two short weeks, with the help of some tantalizing, if temporary, hype.
Just don't expect those breathtaking gains to actually last.
Worth barely $3 a share ahead of its latest quarterly miss, Mandalay has since rocketed to a multi-year high of $6 a share after announcing a celebrated deal with Verizon (NYSE:VZ) and delaying the release of crucial details while the ensuing hype sent its stock on a powerful tear. With Mandalay encouraging investors to hope for the best, they have responded by allowing their imaginations to literally run wild. Clearly sold on the stock and expecting it to gain even further ground, one bullish hedge fund manager recently stepped forward to ridicule the so-called "moron" who chose to slash his massive position in the company despite exciting news of the celebrated Verizon deal.
"Who the hell is selling at these prices in light of this news?" the hedge fund manager recently demanded, before declaring, "Why should we care?"
"Worrying about who is selling or how much more is coming for sale is extremely short-sighted when we know we have a deal in hand that completely changes everything. (So) waiting for the 'cleanup' trade is rather pointless, given where it should be trading when the world wakes up to what is occurring…"
"The size and the scope of the VZ announcement is almost too big to fathom. But make no mistake: It is huge."
Really? How do you know? So far, even Mandalay itself has yet to determine - or at least divulge - the true value of that mysterious deal.
You're probably right about one thing, however. The identity of the recent seller doesn't really matter. Ask yourself a far more relevant question: Why did that big Mandalay shareholder chose to dump all of that stock, instead of holding out for even sweeter gains or - better yet - buying some more of the high-flying shares?
Let's go back to the conference call that sparked this incredible rally in the first place and search for some possible hints. An expert at translating overblown hype, TheStreetSweeper has carefully read between the lines to uncover plenty of revealing clues.
Management Hype: "We have signed a multi-year agreement with Verizon on their intentions to deploy Ignite across their entire Android device line-up, which historically has averaged approximately 20 million devices per year. (Nevertheless), we're not here to update or change the guidance. I agree it's hard to see announcing Verizon is a negative, that's for sure… In the big picture, this is a major milestone for our business and validation of our broader strategy."
TheStreetSweeper Translation: Trust us. This is fantastic news. Without that last-minute deal, we would have simply reported another quarterly shortfall instead. So what if we see no reason to boost the full-year guidance that we set before we ever landed that surprising deal? Be patient. The pesky details can wait. Right now, it's time to celebrate!
Management Hype: "We're in the process of evaluating the near- and longer-term positive impact of the Verizon expansion and look forward to providing you with an update as to what this means to our fiscal 2015 guidance, as well as some insight and perspective into fiscal 2016. We will work to come back to you within the next 30 days with more specifics… One of the things we want to do is we want to improve how we continue to manage the Street, manage expectations, and we continue to really want to work at that … We want to really do this in a holistic way. So when we come back and give guidance, we also want to have you guys think about fiscal '16 as well. We haven't really talked about that, (but) now we have got some better visibility as to what that means for the business."
TheStreetSweeper Translation: Listen. If we really expected the Verizon deal to bolster our results anytime soon, we would probably go ahead and increase our existing forecast right now. We obviously chose to keep our mouths shut - and allow investors to keep their wildest hopes alive - for a little while longer instead. Now sit back and wait for the speculative hype to build. We stand to gain so much ground by the time that we release any concrete details about this celebrated deal that even if we follow up with a disappointing update, we could still come out well ahead in the end. Heck, we might double on the anticipation alone.
Management Hype: "We believe that our current cost structure is sufficient to ramp and scale our existing business and, while we do not expect material increases in operating costs, as previously noted, we will be back to you with a more refined view once we fully incorporate the expanded Verizon deal."
TheStreetSweeper Translation: We hate to even mention the potential risk of additional dilution at this point, since our share count has practically doubled over the course of the past year. We had no idea that we might need the sort of funds required to execute this big Verizon deal when we last tapped the capital market six months ago, though. So don't rule out the possibility of an imminent stock offering. Given all of the cash that we burn just to finance our normal operations, we can't expect the $19 million left in our bank account to last forever, you know.
Management Hype: "We raised capital in March with the exclusive purpose of helping us continue to scale our business. We have been disciplined in our approach, having passed on a few opportunities where we could not come to valuation terms that are in the best interest of our business or shareholders. There are a couple of potential acquisitions that we're excited about, but nothing to report on today. We know that we're in active conversations and hope to have some news to report soon on the M&A (merger and acquisition) front."
TheStreetSweeper Translation: Forget it. We can't afford to sacrifice this tantalizing opportunity. Just think of all the money that we could raise by selling a mountain of our stock if it surges on news of this Verizon deal! We're not exactly flush with cash at the moment, anyway. We'll find some way to spend that money - probably sooner rather than later. Why on earth should we wait around until we're actually desperate? We need to make the most of this situation while we still can.
Management Hype: "We do not view the past quarter as the new normal, as far as the historical business, but rather just as a small and rapidly growing business making short-term tradeoffs… We were disappointed but not surprised by the results, as they were not materially off our internal budget. This quarter's results do not impact our view of the fiscal year, as we have been consistent that the ramp for our new products was to begin this summer, and the first quarter did not include any revenue from those launches. We continue to reiterate our guidance for 12 million Ignite installs and 1 million IQ installs" during the current year.
TheStreetSweeper Translation: Don't bother dwelling on our latest quarterly results. We found the year-over-year deterioration in several of our key financial metrics rather depressing ourselves. Who cares if we fell short of Wall Street expectations again? What's another miss at this point? Now that we landed this fantastic deal with Verizon, we remain on track to achieve our targets for the full year. We just averted a possible disaster!
Management Hype: "Verizon has been very pleased with the performance of Ignite on the LG G3 smart phone, which launched on July 17… We expect launching Ignite on two additional smart phones and one tablet with Verizon over the next 45 days. (We're) not going to communicate any information that's proprietary to Verizon on device sell-through for a specific device. We're not going to go there. What I will say, though, is that a lot of device sales, whether it's from LG, Samsung, HTC or anybody (is) very seasonally driven. The number-two month for device sales tends to be August, after December, in terms of back-to-school and people doing upgrades and so on. It's not traditionally July, as a lot of people are on vacation and doing other things. With that being said, Verizon gave us a forecast on the device based on their experience with the G2. So I think we have got pretty good visibility in terms of what we think that is."
TheStreetSweeper Translation: We can't expect this Verizon deal to suddenly transform our company into an overnight sensation. After supplying Ignite for a single Verizon cellphone with a low adoption rate for applications in general, we're just glad that the company has decided to use our product on a few more of its devices at this point. Why did that annoying analyst have to mention the weak adoption rate for that cellphone, anyway? We wound up sort of contradicting ourselves by blaming seasonality and hinting at a likely burst in activity this quarter, since we specifically warn of a slowdown during that quarter in our official corporate filings instead. We probably shouldn't have mentioned that stuff about Verizon providing us with "pretty good visibility" into the performance of that particular device, either. What if investors leap to the understandable conclusion that Verizon has provided us with some decent insight into the new business that we just landed, too? Oh well. Maybe nobody will bother to connect the dots. We can probably count on investors to take us at our word. It's not like they're demanding answers right now, anyway.
Management Hype: "There are numerous new potential customers that we expect to close and announce over the next 90 days and a few existing customers wanting to deploy additional services as well. While we're not going to preannounce any of these deals, like we have in the past, the bottom line is there is strong momentum in the marketplace for our products and services, and we're taking advantage of that."
TheStreetSweeper Translation: We realize that this celebration won't last forever. We just hope that we can follow up with another deal that's at least worth mentioning soon. After spoiling the market with this big Verizon contract, we've set the bar for the future a whole lot higher, though. Who knows when we will ever spark this much excitement again? So let's just celebrate today and worry about possible headaches tomorrow. We fully intend to savor this intoxicating buzz as long as we can, even if we risk paying it for it with a massive hangover.
* Important Disclosure: The owners of TheStreetSweeper established a short position in MNDL, and stand to profit on any future declines in its stock price. As a matter of policy, TheStreetSweeper prohibits members of its editorial team -- including the author of this report -- from taking financial positions in any of the companies that they cover. To contact Melissa Davis, the senior editor of TheStreetSweeper and the author of this story, please send an email to firstname.lastname@example.org.
Disclosure: The author is short MNDL.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.
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