Quepasa (QPSA.OB) has suddenly become a hotly-contested stock. For the months of December and January, QPSA logged just one day of million-share volume (and that didn’t occur until January 27). February only saw two million-shares days. March, however, true to its reputation, has come in like a lion. Volume topped the million-share threshold in three of the first six trading days. Wednesday's trading came close to making it four-for-seven.
QPSA’s new-found liquidity stems in part from a battle between the stock’s bulls and bears. Indeed, the difference in QPSA’s value if it succeeds or fails is very wide. Calculations vary, but a range of $2 (if the company fails) to $22 (if the company succeeds) is quite feasible. It also creates an easy $20 spread, from which we can calculate implied-success odds. Small changes in QPSA's odds of success will have a big impact on the share price. For example, 25/75 odds only justify a $7 stock price today (25% of the way from $2 to $22 is $7); 50/50 odds justify a $12 share price (halfway from $2 to $22); and 75/25 odds justify $17.
Looking at these calculations, it appears that the recent sell-off has overshot the mark. The current share price only implies a 20-something percent chance of success. At its peak ($15.45), the implied odds were close to 70% -- a little too high, too soon, in my opinion. All things considered (good and bad) something closer to 50/50 seems most appropriate at this time. This implies that QPSA’s shares are currently worth $12, nearly double the current price.
So why is the stock so low?
Of course, stocks don't always reflect value. More often, they reflect supply and demand (a.k.a. buying and selling … or bulls versus bears).
Recently, the bears have been in control and selling has been prevalent. Even bullish investors are selling. Some are in panic mode, while others have received margin calls. When this happens, a sell-off can become very overdone. Panic selling can accelerate and moving averages can be breached, sparking additional waves of selling. Under the circumstances, potential buyers may choose to sit back and wait, even if the current price has them salivating.
Soon, though, the bears run out of ammo. Sellers run out of shares to sell. Bears can no longer find shares to borrow. Negative commentary loses its effectiveness. At that point, the selling pressure dries up like a fire hose after the extinguishing of a blaze. With nobody left to sell the stock further down, the tiniest bit of buying starts the stock moving upward again.
Bulls that have been patiently waiting for a bottom scramble to grab the cheap shares. Analysts who cover the stock reiterate their Buy ratings. The flood gates open and the stock starts to rocket. Short sellers who were late to the game begin to cover in panic. Longs that were forced out have fulfilled their margin obligations and seek to rebuild their positions.
Everything that drove the stock down begins to work in reverse. A 50% retracement of the stock's decline can be erased as quickly as it came. This is why sharp, V-shaped bottoms are so common.
Recent trading implies that we are closer to the end of QPSA’s sell-off than its beginning. The initial sell-off was clearly based on weak fundamental data points. However, that information has long-since been priced in to the shares. Thus, the continued sell-off is clearly based on technical / herd mentality, as opposed to fundamentals. This greatly increases the chances of a V-shaped bottom. In fact, recognizing this will surely cause potential shorts to think twice about initiating such a dangerous position. If so, the bottom will come even sooner.
Bullish investors can do one of two things:
- Buy at a price that reflects attractive odds of success and wait to be rewarded.
- Wait for the bottom and jump in before the frenzy begins.
The latter strategy is harder to execute. Identifying a bottom is hard enough. Acquiring a large chunk of shares when it happens is near-impossible. As for the first strategy, based on my success/failure price range, QPSA's shares currently reflect a near-80% chance of failure. Based on everything we know about the company (good and bad), that seems much too high.
Meanwhile, QPSA's bearish stock-action appears to be coming to a head. It experienced a sharp rebound in Tuesday's action, while the broader market sold off. Finally, QPSA’s presentation at the Wedbush Conference provided greater insight into the issues over which the bulls and bears have been battling. Key points were:
- The company raised over $12M in a private offering at a price of $7.50 per share in December. These funds have been enabling QPSA to execute its gaming strategy, which is expected to spur increased visits and greater time-per-visit from its 32M registered users.
- Converting its registered users into loyal gamers will have a major impact on the company’s value. According to management, Social Gold has estimated the average lifetime value of a loyal gamer in Latin America at $300. The company obviously won’t be able to convert all of its registered users into loyal gamers, but the total opportunity is 32M x $300, or $9.4 Billion. Thus, even a modicum of success will have an explosive impact on the company’s valuation. QPSA will also publish games onto third-party sites, like Orkut and Facebook, thus monetizing more than just its own user base. Four titles will have been released by the end of June.
- Comparisons to Myspace, Bebo, Sonico, Hi5, and Orkut are all invalid. All of these sites are in long-term decline, according to Alexa.com. Aside from Quepasa, Facebook and Badoo are the only oft-cited comparables that are not in secular decline.
- Unique Visits and Page Views for Q1 are still on track to exceed Q4 levels. Quepasa’s recent slowdown is similar to the one experienced at the beginning of last year. In the 12-months since its last slowdown, the company has doubled many of its metrics.
- QPSA’s Distributed Social Media (DSM) strategy is gaining traction. Early engagement-ratios have been outstanding. Thus, DSM is providing customers with tremendous value relative to traditional impression-based campaigns. Its relationships with Sony (SNE) and Grupo Expansion (a division of Time Warner (TWX)) have experienced particularly strong results in a short span, resulting in follow-on engagements.
In short, the presentation was very bullish. The Wedbush analyst made positive comments before the meeting, echoing the sentiments of Ladenburg Thalmann (LTS), which currently has a $16 target on the stock. Management addressed many investors’ concerns and introduced themselves to a number of potentially new institutional investors. If even a few of these institutions latch on to the story, the stock could start to rebound imminently.
Disclosure: I am long QPSA.OB.