First quarter operating results were outstanding, with 33% sequential growth in revenues. In addition, the company has grown its client base to 92 clients using OPEX, with 40 more in the signup process. Finally, the company appears to be gaining market share in crude oil derivatives, which could be a very important market for the company going forward. Optionable estimates the market for natural gas derivatives to be about $150-200 million per year, and the market for crude oil to be $200-250 million per year. If Optionable can capture a quarter of each of those markets over the next several years, than we are looking at about $110 million in potential revenue and probably about 40 million in net income. Given that the current market cap (accounting for dilution of 20 million shares due to NYMEX warrants is about 375 million, this would yield a 2009 P/E of about 9 (assuming that Optionable can achieve 25% market share by 2009).
There remains significant uncertainty surrounding all of these future forecasts. Most striking to me was the fact that the Bank of Montreal represented 30% of revenues in the first quarter, which shows an increasing trend from last year (Question #2 on the CC). In addition, management failed to really address the follow up question surrounding whether Optionable’s exposure to the Bank of Montreal was really more than 30%. They simply stated that it was likely that other parties would continue to make their trades even without a counterparty in BMO. My take on the issue is that there is some counterparty risk, although it does not represent 100% of the trades made by BMO. In addition, management declined to indicate whether they had seen a decrease in trading from BMO in April, and simply said that “nobody has pulled the plug on us.” Does this mean simply that BMO remains a client on the books but has not been active, or that they are actually continuing to trade with OPBL? I don’t know the answer to that question, but if BMO is still trading with OPBL, why wouldn’t the management be emphasizing that on the CC? The tone of that discussion (Question 7) just didn’t sound good to me.
Finally, the NYMEX deal is going to result in a substantial charge in the rest of the year. Coupled with the increased share count and a potential loss of business from BMO, it is obvious that the net income numbers are going to slow and probably decline sequentially in the second quarter. If top line growth continues to be good, the market will easily overlook the issue of warrants, but the potential for a bad top line and a bottom line affected by the warrants exists for Q2. How the market would react to this scenario is anybody’s guess, but the warrants could exacerbate any selling by making the numbers appear worse than they already are.
Based on my quick analysis of Optionable’s potential future earnings, the stock appears to be reasonably and perhaps slightly underpriced relative to its potential. The P/E will have to come down over the next few years as the company begins to saturate its market, so we are not looking at a company that can carry a 45 P/E forever.
However, the problem with my above analysis is that it assumes that the company can carry on with its sequential growth story, and after the recent news from the Bank of Montreal, I am skeptical as to whether that is going to happen. In particular, the fact that BMO represented 30% of revenues in the first quarter is very troubling, because it indicates even more concentration in one place. Given that number, I think we have to call into question the 3% market share of OPEX on crude oil options over the first week of April as well. Could that represent just BMO’s trading?
The bottom line is that despite signing a number of new clients in the first quarter, Optionable became more reliant on BMO for revenues. This requires explanation, and we did not get any on the conference call. Neither did we get an assurance that BMO is continuing to funnel a lot of business through Optionable, so there is very much a cloud around the company’s future revenues.
Overall, OPBL’s current stock price implies that we are paying a hefty premium for future growth. This was an acceptable situation when Optionable appeared to be on a linear growth path with good earnings visibility. However, the issue with the Bank of Montreal has decreased earnings visibility significantly, and it certainly has the ability to alter Optionable’s growth path. I am not in the business of paying for future earnings that seem less than certain, and therefore, I believe it is best to take a wait and see approach with regard to Optionable. Second quarter numbers should provide much more clarification, and until then, the prudent way to play this is to wait for a more reasonable price. There is still potential here, but given the uncertainties, paying full price for this potential does not appear to be justified.
On a final note, although I am passing what appears to be a negative judgment on OPBL; this is definitely not a stock to be shorted. The already high short interest and high growth potential of OPBL make this an incredibly dangerous short play at current price levels.
Full disclosure: No position in OPBL.OB