Sungy Mobile: Should You Catch This Falling Knife Before Its Earnings Announcement?

Aug.27.14 | About: Sungy Mobile (GOMO)

Summary

The number of downloads in Q2 ranked in the top 5 globally.

The stock is at a low valuation level.

Sungy Mobile (NASDAQ:GOMO) is a provider of mobile Internet products and services globally with a focus on applications and mobile platform development. Its flagship products are GO series products and GO platform built on the Android operating system, as well as mobile reading services such as 3G.cn and GGBook. Since its listing in November last year, its stock price has been on a roller coaster. After reaching the 52-week high of $33.87 in March, the price kept tumbling and currently stayed around $10 at the time of writing, close to the all-time low of $9.91.

The company will issue its Q2 result after the bell on Wednesday. When I was writing this article, a bearish article from TrinityResearch was published. To give SA readers some alternative perspectives to evaluate the stock, I would like to state a few reasons why I am bullish on the stock.

The number of downloads in Q2 ranked in the top 5 globally

The huge decline in stock price was attributable to the market concerns over the sustainability of the company's businesses (readers can refer to TrinityResearch's article). What's more, the EPS of the company in Q1 missed its estimates, while the management gave a below-consensus guidance for Q2 revenue. However, in my opinion, these concerns or risks could already be priced in after the decline in stock price by over 66%.

First, we can take a look at the below chart from the company's investor presentations, which illustrates the quarterly revenues from 2012Q1 to 2014Q1.

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We can see from the chart that the revenue was still growing on a yearly basis, despite a slight sequential decrease in Q1 2014. To grab an understanding on how the business performed going forward, I did my research on App Annie. I found out that there have been over 1000 applications published under the name of the company in Google (NASDAQ:GOOG) (NASDAQ:GOOGL) Play globally. Therefore, I believe that it is inappropriate to evaluate the business performance by only looking at the performance trend of a specific version in some specific countries. In contrast, we should look at the aggregate number of downloads of all these applications on a worldwide basis. Surprisingly, the ranking of the company, measured by the overall global downloads, actually climbed from no.7 in March to no.5 in June. With these numbers of downloads, I think there is a possibility that the company could deliver a strong quarter and beat the analysts' estimates, especially if the guidance is not high ($16M-$17M).

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Low valuation

According to Finviz, the stock is now only priced at a forward PE of 10.23. The company holds cash and cash equivalents amounting to $3.66 per share, without incurring any borrowings. In addition, the company has generated positive operating cashflow since 2012 (e.g. $11m in 2013). At this valuation level, I think the downside of the price is very limited. Remember, even the current business is at the bottleneck, the company could explore new business opportunities or acquire potential start-ups by utilizing the cash on its balance sheet. On the other hand, I think the shorts are susceptible to the risks of privatization/being acquired posed by its low valuation level.

Final remarks

In summary, I believe the stock price may already have reached its bottom. However, I am convinced that the best investment practice is not to initiate positions in small-caps just before earnings. It is too risky for both longs and shorts.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.