Is New Motion/Atrinsic Intrinsically Undervalued?

Atrinsic is a company that was formed by the combination of mobile entertainment company New Motion (Nasdaq: NWMO) with online advertising and performance marketing company Traffix (formerly Nasdaq: TRFX). The ink is just starting to dry on the merger docs (deal closed February 5) and the company’s announcement of a name change to Atrinsic is now a week old. For these reasons, and perhaps also due to the company’s new listing status on the Nasdaq, many investors are not aware of the company or its potential as a player in the rapidly emerging wireless entertainment space.

Despite management’s post merger reiteration of the 30 - 40% consolidated revenue growth target discussed prior to the merger, New Motion’s shares have been in a free fall. The extremely low trading volume and extraordinary number of “odd lot” trades that have contributed to the free fall lead us to believe that the sell off is largely the result of capitulation by former Traffix shareholders. Many Traffix shareholders likely appreciated the concept of a slower growing company that pays a 6% dividend and/or expected to receive shares in the merger that would be valued closer to the $10+ figure indicated when the deal was first announced, which was based on the trading price of New Motion stock on the date the deal was announced.

We believe that many Traffix shareholders who were already skittish about the loss of that big dividend simply did not have the stomach to stay the course as they watched the price fall lower and lower in the days following the closing. As is often the case, this type of selling can “snowball” pretty quickly in the absence of a positive catalyst and you get what we have seen here - a steady decline in New Motion’s share price.

A few things that all existing shareholders and potential shareholders should consider - New Motion is now trading at a cash adjusted market cap of about $94 million. Management has projected current year revenue to fall in the $145 - $160 million range and for EBITDA to fall between $15 - $20 million. While we believe that these estimates will prove to be conservative, we must note that a company in a hyper growth sector that is growing the top line by 40% year over year (with even greater bottom line growth) should command a valuation that is a multiple of their revenue, rather than a percentage of it. The growth potential in this space is very much like the growth potential for online services was 10 years ago, except that nearly hundreds of millions of consumers already own the necessary platform (wireless phones and other devices), they carry it with them wherever they go and all are already accustomed to getting a bill for their service each month, which is the same bill that New Motion’s services are billed to. Thus, the market is there for the taking and those companies that establish themselves early and build the best marketing mouse trap stand to make their shareholders a fortune.

A few more key points for New Motion shareholders and potential shareholders:

1) Prior to the merger, New Motion alone had a trading range that equated to a market cap between $154 million and $210 million and had approximately $13 million in cash. The post merger sell off has reduced the market cap to $126 million as of the close on February 25. Thus, the stock is now trading as if it were worth $28 million less than its lowest previous trading point, even though New Motion now (post merger) has $35 million in cash, no debt and an established cash flow machine in the acquired Traffix assets.

2) Besides Traffix’s considerable cash flow generation capabilities, the lead generation services that were so valuable to New Motion (so valuable that the company spent over $10 million with TRFX in the last half of 2007) are now available to New Motion with no third party markup. It would follow that New Motion will now be able to even better avail themselves of those channels to drive subscriber growth while driving down subscriber acquisition costs.

3) Prior to the merger and during the time that the company traded in the market cap range of $154 million to $210 million, they were listed on the OTCBB, a marketplace where companies are generally given less of a premium valuation vs. a similarly situated listing on the higher profile Nasdaq stock market. Though NWMO had already qualified to make the move to the Nasdaq prior to the merger with TRFX, it is reasonable to assume that their valuation was somewhat stunted due to the fact that they had not yet made the move to the Nasdaq.

4) We believe that the synergies of the combined entity are enormous and that there may be additional synergies that the company has not factored into their 2008 projections. In fact, we think the 2008 projections are not aggressive at all and that the company has set the bar low so that they can exceed their projections. Even if they just match the projections of 30 - 40% revenue growth and free cash flow generation of $15 - $20 million the company should command a premium valuation.

5) The company has made it clear that they intend to grow both organically and by acquisition. It's hard to imagine that they would want to use their stock at these prices as an acquisition currency. As such, I would expect the post merger news/PR lull to end just as quickly as it began and we should see the company begin to tell their story to the investment community and note that management is presenting at the Jeffries Internet conference later this week.

The bottom line is that New Motion post merger is worth substantially more than it was prior to the merger. The events of February (Traffix shareholders dumping the stock, moving from the OTCBB to the Nasdaq and the name change to Atrinsic) have simply caused a near term aberration in the company’s stock price. As the investment community becomes aware of the New Motion story, we would expect the stock price to increase to at least reflect the low end of the premerger market cap range + cash acquired (about $7 per share) as the low end of their new trading range and ultimately trade substantially higher. We also expect that at some point over the next 12 - 18 months there will be a recognition of the potential for the companies in the wireless entertainment space to become growth stock investor darlings, whereby we might start to see multiples expand to exceed annual growth rates, like we have seen in many scenarios where investors become enamored with a new sector. In such a scenario, we would expect the high end potential to reflect a hyper growth multiple that could be justified in light of the potential of such a company in this space with these assets. When this occurs, we think investors will view New Motion in a different light that could allow investors at today’s prices to reap exponential gains.

Disclosure: Author has a long position in NWMO

Comments

[tromy98:]

Great article agree with your analysis

2008 Mar 27 08:00 PM