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John H. Ford
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For the past 30 years, I have been involved in startups, as a founder, and active investor. My first company was purchased by Johnson & Johnson, which set the foundation for future investments. My level of trading escalated after graduating from college, primarily as a result of my... More
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  • USell: Why This $2 Stock Should Be Trading Above $6 Today

    Summary:

    • uSell just reported 40% year-over-year revenue growth for Q2 and Q4 results could be considerably better.
    • uSell's business model has been validated by partnerships with Fortune 100 corporations.
    • Recent insider and institutional buying confirm undervaluation.
    • NASDAQ up listing will be a positive catalyst for shareholders.
    • Strong cash position and no debt amplify undervaluation.
    • 92% gross margins and low overhead give this company tremendous profit potential.
    • uSell has grown so rapidly that it is now receiving more unique visitors to its website than its prime competitor.
    • The company's total addressable market exceeds $100 billion annually.

    I am long uSell, (OTCQB:USEL), an undiscovered, undervalued and rapidly growing competitor to eBay (NASDAQ:EBAY) and Gazelle.com. USell just reported 40% year-over-year revenue growth for Q2, and I expect revenue growth to accelerate later this year. The company's business model has been validated by partnerships with Staples (NASDAQ:SPLS), and TracFone (NYSE:AMX).

    USell is currently valued at $20 million, fully diluted, but I estimate the company should be valued above $60 million today, and could be worth considerably more within 12 months if the current level of revenue growth remains on track.

    Right now Wall Street knows nothing about this company or its 92% gross margins, low overhead, and partnerships with Fortune 100 companies. But that will change, and I expect the share price to more than double once investors discover this unknown gem.

    70% quarter over quarter growth in orders placed

    While 40% year-over-year revenue growth is impressive, the number that really highlights uSell's undervaluation is the 70% quarter over quarter growth in orders placed. Orders placed during the quarter ended March 31, 2014 were 85,000. That number grew 70%, to 146,000 orders placed for the quarter ended June 30, 2014.

    Orders placed is a direct indicator of future revenue, and quarter over quarter orders placed growth of 70% confirms that uSell is capturing market share from competitors.

    IPhone 6 release could accelerate growth even further

    I expect the iPhone 6 and 6 plus to be two of Apple's most successful products, and millions of customers will be converting to these new devices. When that happens, they will need to sell their old smart phones, and uSell should be able to capture a large percentage of this business. As a result of the iPhone 6 release, I wouldn't be surprised to see quarter over quarter revenue growth to go beyond the current 40% level. With growth like that, uSell should be trading at a premium, not a discount.

    Why I like uSell

    USell gives customers a way to sell their electronic devices instantly, in a completely hassle free environment. USell's largest competitor is eBay, a great company valued at $65 billion. Like eBay, USell doesn't hold products in inventory, it's platform just connects buyers and sellers. USell generates revenue by charging a commission for each transaction.

    But from a customer perspective, some aspects of uSell's business model are superior to eBay's which is a prime reason uSell's revenue growth is so impressive. Customers are recognizing that when it comes to selling devices, it's much easier to do so with uSell. This also makes uSell a buyout candidate for eBay.

    Here are some additional reasons I have invested in uSell:

    Number 1: USell's global cell phone total addressable market exceeds $100 billion annually. When you include tablets, laptops and a myriad of other retail devices, this market is substantially larger.

    Number 2: Since uSell is a software-based business, the company is capable of massive scaling, with minimal additional costs. As uSell grows, leverage amplifies what is applied to the bottom line.

    Number 3: Both uSell and the market it is addressing, are in very early stages of development. As is always the case, investors who get in early, reap the greatest rewards as long as the company is effective with its execution.

    Number 4: Dr. Phillip Frost bought 9.99% of the company (most of my Frost investments have provided returns in excess of 100%). This is just one more validation of the company's technology, because the level of due diligence Dr. Frost and his team are capable of conducting is high.

    Number 5: Michael Brauser owns over a 9% position in uSell and is chairman of the board. Mr. Brauser is a well renowned entrepreneur who has developed and sold numerous tech companies for a combined total approaching $2 billion. The presence of Mr. Brauser (along with Dr. Frost) indicates that uSell has valuation potential far beyond where it is trading now.

    Why I prefer uSell to eBay

    When I buy electronic devices, eBay is generally my first choice. It's fast, easy and price competitive. For buying, I love eBay.

    But I just tried to sell a device on eBay, and it was a nightmare. I didn't like the hassle of taking photos, writing up a description, filling out forms, monitoring the auction for 7 days, dealing with PayPal problems, and answering buyers' questions. Without going into the details, I spent numerous hours trying to conclude this transaction with a difficult buyer, and PayPal didn't make it any easier by putting a 21 day hold on the buyer's funds. Ultimately the transaction was canceled.

    My uSell experience

    In order to evaluate uSell, I decided to sell an iPad on uSell's website. The process was effortless. It took me less than 2 minutes to conclude the transaction. I was offered a fair price. No photos or descriptions were needed, and I didn't have to monitor the auction process or answer buyers' questions. It was so simple.

    I especially appreciated the fact that uSell sent me a postage-paid shipping kit so I didn't have to deal with packaging or postage. Selling a device on the uSell website was actually a pleasant experience. In my opinion, when it comes to selling devices, uSell's business model is far superior to eBay's. I will be a repeat customer.

    But I am not the only happy customer. I went to resellerratings.com and uSell had over 1300 reviews, with an average rating of 8.7 out of 10. Resellerratings.com is Google's trusted third-party review site, and in my opinion it's the best rating site.

    From my experience it became apparent that uSell puts a lot of emphasis on customer service, which is key in the online environment. For myself, it's gotten to the point where customer service is a prime factor when choosing between products that I buy.

    If you're considering investing in uSell, visit the company's website

    USell is a relatively new company, so not many people are aware of the advantages of selling through this website. But that will change. I am not the only person frustrated with trying to sell on eBay, and as awareness spreads, I expect uSell to continue to take market share from eBay. If you're thinking about becoming an investor, I highly recommend going to uSell's website.

    Interview with uSell founder and CEO Daniel Brauser

    I wanted to learn all I could about the company, so I initiated a series of conference calls with founder and CEO Daniel Brauser. Following are excerpts from those interviews:

    Q: How did you come up with the idea for uSell?

    Daniel Brauser: Individuals find eBay a really easy way to buy products, but selling products has become extremely cumbersome. The reason for this is that eBay has geared its business towards professional sellers, or "power sellers", so that they can control the quality of the buying experience. We saw that this created a major void in the market and developed our model around the concept of providing an alternative for sellers: we offer the "Sell It Now" option, much like eBay provides the "Buy It Now" option. We are providing the same instant gratification experience for sellers that buyers receive on eBay. Additionally, since not a lot of individuals are selling products on marketplaces like eBay and Amazon, power sellers that focus on selling used products have found it increasingly difficult to find enough inventory. We provide a solution by offering these merchants a way to source inventory directly from consumers.

    Q: Can you please elaborate?

    Daniel Brauser: Many of the merchants that buy in bulk through our platform are also eBay power sellers. So we're really solving two problems, we are making the selling process easier for individuals, and we are providing inventory to professional sellers.

    Q: What kind of feedback are you getting from customers?

    Daniel Brauser: Customers praise the speed of the service, ease-of-use, and the price they're able to sell their devices for. The fact that we offer a marketplace where buyers compete to buy devices really helps our customers maximize value. We also take all the risk out of the transaction for the consumer, because we only deal with reputable buyers. Problems can always arise; however, if a customer has an issue, we step in to mediate the transaction. If a buyer has a history of complaints, we cut them off. In the last six months we have cut off four buyers, but not a single one has left voluntarily.

    Q: Do you have any other competitors other than eBay?

    Daniel Brauser: Our other major competitor is a VC backed company called Gazelle.com. But in one sense we don't really consider them competitors because Gazelle is a direct buyer of goods. Not only do they have to market their service to consumers, but they also receive and inspect devices, pay customers, package devices for resale, and then sell through either retail or wholesale channels. uSell, rather, is a marketplace. We leverage the power of the marketplace and control the experience by tying the different pieces of the value chain together with technology

    Q: Is there any competition doing it exactly like you are, without holding inventory?

    Daniel Brauser: No, there's not. The only real comparison would be eBay. But eBay has significant flaws if you are trying to sell products. We give them all the credit in the world, especially with eBay's "Buy It Now" option. But they don't have a "Sell It Now" equivalent. That's what we provide.

    Q: Since you fill a void that eBay doesn't provide, wouldn't you be an ideal buyout target for eBay?

    Daniel Brauser: While I know little about what eBay looks for in acquisition targets, it's easy to see how uSell could be a complimentary service for any larger ecommerce site like eBay's user base.

    Q: With all the expenses related to inventory, I would think that you will ultimately be more profitable than a company like Gazelle.

    Daniel Brauser: I would agree. We do not operate any warehouse facilities nor do we have to deal with the logistics of receiving devices, grading them, inventorying them and selling them or the cash constraints that go along with all of that. The biggest advantage we see here is that we get to focus all of our attention and energy on two things; marketing and customer experience. In other words our mission is to activate the market and then deliver a great service so the word spreads and customers keep coming back. But I value the competition because it validates the size and potential of the market. Our understanding is that Gazelle has raised over $60 million of VC money, so a lot of people are taking this space seriously.

    Q: I saw one of Gazelle's TV commercials last night, and it was good. Do you think that Gazelle's advertising could bring customers to you?

    Daniel Brauser: We know that this is a huge market that has been largely inactive historically. Advertising dollars spent, even by our competitors, helps to activate it. Practically speaking, this means that more people will be searching for terms like "sell my iPhone". Our track record with customers has catapulted us to the top of most of the relevant Google search results. Because our prices are generally better than competitors, we are confident that we will continue to win a meaningful share of the increasing pie.

    Q: Since your business model is software-based, can you expand without occurring much additional cost?

    Daniel Brauser: Our business model, which is similar to marketplaces like eBay, Uber, and AirBNB doesn't require significant fixed overhead outside of the expenses required to employ a team of A players. It doesn't require buying property or equipment, or any other significant infrastructure costs as the business scales. It takes advantage of the throughput of the entire market, and therefore we have ultimate scalability, with limited cost increases.

    Q: How strong is your IP protection? In other words, would another company be better off trying to replicate your business model from scratch, or just buying your company?

    Daniel Brauser: The IP behind our seller's marketplace is significantly nuanced with several highly specialized refinements. The learning curve that we encountered in the process of developing it to where it is today would take similar time and experience for someone else to replicate. Therefore, we feel that regardless of the resources available, if another company wanted to get into the space, the quickest way would be by acquiring us versus attempting to replicate what we have built. Being that we are in a young and rapidly evolving market, we feel this time advantage is a significant asset of ours.

    Q: What's your growth potential?

    Daniel Brauser: We believe that we can build uSell into a multi-billion dollar business. We designed our service to be vertical agnostic and have proven our ability to launch new and disparate verticals with our recent addition of new categories such as textbooks and gift cards. Our focus still remains on smartphones; however, as we feel that it is critical to build liquidity in one vertical first, much as Amazon did when they focused on textbooks for the first four years of their existence.

    Q: Can you talk about your marketing expenses in relation to revenue?

    Daniel Brauser: Our marketing efficiencies have been consistently growing since the inception of the business. What we have shown is that when we first started marketing we would spend one dollar in marketing, and we would get less than one dollar back in revenue. Over time, that ratio has reversed itself. We spent the next dollar in marketing, and it drove in one dollar in revenue. Then the next dollar in marketing drove in over a dollar in revenue. We've gotten to the level where we are now generating a nice positive return on those marketing dollars spent. This is why word-of-mouth and repeat transactions are so important because they allow the business to grow, without spending additional marketing dollars. If you don't have customers coming back and transacting with you again, then you're only as good as your last transaction, which means every dollar you spend in marketing creates a fixed ratio in terms of return. What we've done is proven that the ratio is expanding. We credit our focus on making sure to deliver an excellent customer experience here. We are receiving increasing amount of positive customer feedback, which is lining up nicely with increasing repeat transaction rates and word of mouth traffic.

    Q: When you expect to be profitable?

    Daniel Brauser: We could be profitable today. We are generating profit on every transaction, and high margin on every transaction. But we believe that investing in marketing and our technology to better serve our customers at this stage while postponing profitability is the most efficient means of becoming a multibillion-dollar company. Marketplaces are unique businesses. At this stage in a marketplace, it is absolutely critical to focus growing Gross Merchandise Value. In other words, we must focus on growing the total value of transactions that are processed through the marketplace. We have seen huge growth in this number. In Q2 of 2014 alone, we processed close to $5.8M in merchandise value. Investors that pay close attention to our progress are thrilled by the magnitude of this number. They realized that it is the one metric that measures the true value of our marketplace to buyers, sellers, and to us.

    Q: Who are your buyers?

    Daniel Brauser: We have buyers that are authorized retailers for carriers like Verizon, AT&T, and Sprint. We have other buyers that are eBay power sellers. Others are selling to international wholesalers, or the domestic warranty and insurance companies. They are basically smaller versions of Gazelle. Gazelle is larger than our buyers largely because it has raised the most capital. This space is seeing a tremendous amount of activity and a lot of investment. This is one of the hottest segments in the Internet space right now.

    Q: Why is there so much activity in this space?

    Daniel Brauser: This is a huge market. If we only look at the cell phone market, we have over 300 million cell phone users in the United States. The most recent stats show that smart phones have over 60% market penetration. These devices have significant value. An iPhone for example is a $700 plus retail device that consumers buy a lot cheaper because they get it on a two-year contract, so they don't always realize the full value. These devices are built to last for 5 or 6 years but nobody keeps their smart phone for that long. As long as Apple, HTC and Samsung keep creating new products the turnover rate will continue to increase. At this point, the trend is for people to get a new smart phone every 18 months. So you have a significant amount of value that is left over in these devices that are no longer being used. The carriers are also implementing changes that are allowing customers to get new phones even faster. What we are most excited about is that the industry is coming to life. We know that we have a very efficient business model to take advantage of this new trend that's developing in this space. Best of all as activity in this space accelerates, we have the ability to ramp up without much increase in cost.

    Q: How big is the used smart phone market?

    Daniel Brauser: Around 150 million new smart phones are sold in the US now each year. What you have to think about is that for every new phone that is sold, there is likely a used one that would be available to be sold. The average secondhand price of one of these used smart phones is about $100. That would equal a total addressable market of $15 billion annually just in the United States. Also, there's nothing to say that this business model won't work equally well on a global scale.

    Q: How many new smart phones are sold globally?

    Daniel Brauser: Global smartphone sales are expected to reach 1 billion units this year.

    Q: So that would give you a global total addressable market of $100 billion?

    Daniel Brauser: Yes.

    Q: How do you get paid?

    Daniel Brauser: The buyer pays a transaction fee.

    Q: Can you disclose what that fee is?

    Daniel Brauser: We can charge a different transaction fee for each device listed on the platform, and we can modify these in real time. One of the advantages of reCommerce is that our fee is already baked into the price that the seller sees on the website. This is because sellers are not interested in how much we make; they simply want to know how much they are getting. For example, if a buyer bids $100 for a device, we may decide to show the seller a price of $80. When the buyer pays the seller, we would take $100 from the buyer, pay $80 to seller, and pocket the difference. As far as the seller is concerned, she got exactly the price that she saw on the website. This is all that matters to her. This ability to obscure our fees enables us to set a different fee for each product based on the conversion elasticity for that product. This is a huge advantage for us.

    Q: Who pays for the shipping?

    Daniel Brauser: The buyer.

    Q: Your business is very eco-friendly because you could be recycling hundreds of millions of phones that would otherwise end up in landfills. Do you have any idea how many phones you could recycle on an annual basis?

    Daniel Brauser: To date, we have kept over 350,000 devices out of landfills. We actually have a counter on the bottom of our homepage that shows this statistic.

    Q: Can you comment on the Staples and TracFone deals?

    Daniel Brauser: Both these deals really validate the value of our technology and it continues to validate this rapidly developing industry. You have Fortune 100 businesses that are deciding to get involved in this industry because they see that this is something that their customers want and need. Because of the platform and the marketplace that we have built, they see us as best in class. Even more importantly, it's allowing us access to their existing customer bases, which can be very profitable for us because these existing customer bases don't have acquisition or marketing costs. TracFone has over 20 million subscribers and Staples has 30 million unique visitors per month going to their website, so the economic potential for both these partnerships is tremendous.

    Q: How did you get the Staples deal?

    Daniel Brauser: They came to us.

    Q: Why do you think they chose uSell over Gazelle?

    Daniel Brauser: The reason they chose us over anybody else in the space is because we are the only true marketplace. Our marketplace approach is the only approach that is going to aggregate the largest number of SKUs and create an environment of best pricing for the seller. We believe they wanted to make sure that they were going to provide the best in class experience for their customers as well as the best possible prices. They believed uSell could deliver on both those fronts. Our technology fueled marketplace approach delivers that better than anybody else in the industry.

    Q: I found that when I compared prices, uSell always delivered the highest prices when compared to Gazelle. Do you think that impacted Staples and TracFone's decisions?

    Daniel Brauser: Yes.

    Q: Can I assume that there are other potential partnerships in the works similar to Staples and TracFone?

    Daniel Brauser: Absolutely. While this is a distribution strategy for us, our focus is kept on growing our core business and brand and that is where we are most excited about the traction we are making.

    Q: Can you comment on what kind of revenue these deals could generate for uSell?

    Daniel Brauser: I'm reluctant to do so because it's really early in the process. These 2 deals are very meaningful for us because they substantiate an entirely different distribution channel for us that is very low cost that continues to leverage the asset value of the technology we've created. It's highly scalable because this is tapping into existing user bases.

    Q: Who are some of your other potential partners?

    Daniel Brauser: The first obvious group would be any company that is involved in mobile, in any form. But it actually extends further than that, because uSell is a reCommerce marketplace, and many products can be sold. I don't think there's much in the way of limits in terms of where that can go.

    (At this point the interview was concluded).

    Interview summary:

    Here are some of the key points from the interview:

    Number 1: In my opinion, uSell will prevail over Gazelle because it can offer customers higher prices based on the marketplace model. USell should be more profitable than Gazelle because of Gazelle's infrastructure and inventory expenses. For example, Gazelle will be investing $22.3 million into its Louisville Kentucky facility. USell will not have those type of infrastructure costs because it is a software/marketing company, and all the heavy lifting is done by buyers and sellers, in much the same way eBay's buyers and sellers support eBay. The simplest way to view this is that with uSell, the buyer and the seller are doing all the work, and uSell simply takes a commission.

    Number 2: This portion of the Internet space is in its infancy stage, and will see explosive growth in the next couple of years. USell is providing a service that people need and providing it in a way that will drive revenue through word-of-mouth, and repeat customers. My largest returns have come from making investments early in the development stage.

    Number 3: CEO, Daniel Brauser understands the entire landscape, knows what needs to be done, and appears to be more than capable of developing uSell into a multibillion-dollar corporation. After hours of conversations with him, I was impressed with his intelligence and foresight, and he was one of the primary reasons I established a long position in uSell.

    Number 4: This is a business that will have a long life cycle because device recycling will only accelerate as more of the world's population becomes device users. The long life cycle ensures a large opportunity for profitability and growth.

    Number 5: USell's expansion potential is large, given that many different types of products can be sold on its platform. Remember, Amazon started off selling only books, but rapidly expanded to cover most types of products.

    Number 6: I am a big fan of software-based business models. Large expansion campaigns can rapidly be conducted at relatively little cost, which adds considerable leverage to a company's bottom line.

    Number 7: One factor that will drive new customers to uSell's site is the ability to find out what your device is worth. You can do this in approximately 30 seconds. You can also do this on eBay, but it's a lot more work. In my opinion, eventually a large percentage of these visitors will be converted into customers.

    Number 8: USell could be profitable today, which offers some downside protection because the company ultimately has control of its balance sheet. But I agree with Daniel Brauser, that taking the Amazon path, and postponing profitability while gaining larger market share, will provide the greatest shareholder value.

    Number 9: I would not be surprised to see buyout offers over the next 12 months. If Best Buy (NYSE:BBY) or eBay wanted uSell's platform, it would be much easier to buy uSell rather than try to develop the platform from scratch.

    Number 10: The next obvious partnerships would be with OfficeMax (NYSE:OMX), and Office Depot (NYSE:ODP). The fact that Staples and TracFone chose uSell, should make it easier for uSell to begin negotiations with other partners.

    Who will prevail, uSell or Gazelle?

    Sellers will choose the company that offers the highest price. As I stated earlier, I believe that uSell's marketplace model will prevail, because this model has been able to give customers the highest price, and that should continue to be the case.

    For the top 38 products that had offers from Gazelle and uSell, uSell's prices were 58% higher on average than Gazelle's. With such a dramatic price differential, it's easy to see why uSell should ultimately capture most of the market.

    But that makes sense, because uSell's cost structure is considerably lower than Gazelles because uSell isn't having to deal with inventory and all the related expenses.

    Also, while Gazelles website is functional, uSell's website is less cluttered, and much easier to use. Even if I could receive the same pricing from either company, I would still choose uSell, because of its website.

    Let me be clear; Gazelle is running a viable business. If uSell didn't exist, I would sell my devices on Gazelle's website. Gazelle has raised over $60 million in VC capital, which is no small feat. I just expect uSell to be more profitable as a result of the company's non-inventory based business model, and for that reason I think uSell makes a better investment.

    Gazelle is not yet publicly traded, but an IPO is expected. Since this sector is heating up rapidly, I may participate in an IPO trade.

    Who is winning the race now, uSell or Gazelle?

    When I began my research about 12 months ago, Gazelle was clearly ahead of uSell. But that has changed, and uSell is now surpassing Gazelle in terms of unique visitors. This can be confirmed by going to compete.com and comparing uSell to Gazelle. I expect this trend reversal to accelerate, as uSell continues to gain traction. As long as uSell continues to offer sellers the highest price, it should continue to gain market share.

    What is uSell worth today?

    The best way to estimate uSell's valuation, is to compare it to the closest competitor; Gazelle. Gazelle generated $116.1 million in device revenue for 2013. With a 3X multiple, low for this high growth sector, that would give Gazelle a valuation of $348.3 million, today. In my opinion, a 3X multiple is conservative, and given the growth rate, a 5X would probably be more appropriate, giving Gazelle a valuation well over $500 million. A well orchestrated IPO could take this valuation substantially higher.

    In order to value uSell, we need to understand the difference between Gazelles reported revenue, and uSell's reported revenue. Gazelle is reporting revenue for devices sold. In other words, if a device sells for $100, Gazelle reports $100. USell on the other hand is reporting revenue for commission on devices sold. USell is simply acting as a broker, and not actually handling each device. If a device sells for $100, uSell is taking a commission of approximately 20%, or $20 per device sold and reporting $20 as revenue. This is how uSell is able to generate gross margins above 90%. To summarize, if Gazelle sells one device for $100, it reports $100, if the same device is sold through uSell for $100, it reports $20.

    In order to compare Gazelles revenue to uSell's revenue, we need to estimate uSell's device revenue, because uSell reports commission revenue, ($20), and Gazelle reports device revenue ($100).

    USell has managed the sales of about 350,000 devices since the beginning of 2012 at an average price of at least $65 per device for a total of nearly $23 million paid to sellers. This can be confirmed by going to the bottom of uSell's homepage, and looking at the ticker count which displays the total number of devices sold and dollar amount paid to sellers. It is important to note this is the price paid to the sellers from the buyers. This is not device revenue. The buyers would then go on to resell this device to an end-user for approximately $100, which would equate to device revenue.

    For further clarification, when comparing this $65 number to Gazelle, this would equate to their cost of goods sold as it is the price paid to acquire the inventory. The revenue that they book is when they turn around and sell these devices back to end users. If Gazelle bought a device for $65, and sold it for $100, the $100 number would be device revenue.

    In order to calculate uSell's device revenue, we take the 350,000 devices sold since 2012, and multiply it by $100 per device, and that gives us a total device revenue of $35 million. This $100 per device is the device revenue that the end-user ends up paying.

    This $100 figure is comparable to what Gazelle gets when it sells a device and books revenue, in other words device revenue. Our goal is to compare device revenue from uSell to device revenue from Gazelle.

    If we look at uSell's reported revenue for 2012 and 2013, we see that approximately 66% of the total revenue for those 2 years was reported in 2013. This can be confirmed by looking at the relationship between uSell's reported revenue, (commission revenue) for 2012 and 2013. If 66% of uSell's device revenue was generated in 2013, that would equate to over $23.1 million in device revenue for 2013. In other words, 66% of $35 million is $23.1 million.

    With uSell's $23.1 million in 2013 device revenue, and using the same 3X multiple, that would give uSell a valuation of $69.3 million, today. Some would consider that a conservative valuation, because a 3X multiple is low for a company with such a high rate of growth in a rapidly expanding segment. Many would argue that a 5X or 10X multiple would be more appropriate. But even with a conservative 3X multiple, uSell is still worth more than 3 times today's valuation.

    Since uSell will probably always be able to offer the highest price to device sellers, it's logical to conclude that uSell will ultimately have the larger market share. I know that if Gazelle were publicly traded today, I would buy uSell, not Gazelle (except for a quick IPO trade).

    However, if Gazelle is able to run a successful IPO, that will only help uSell, by bringing increased awareness to this sector, and potentially bringing high valuations to all involved. And it won't take Wall Street long to figure out that uSell provides the more profitable business model.

    NASDAQ up listing will increase uSell's value

    The company has stated it intends to up list to the NASDAQ exchange. The timing on this is uncertain, but an up listing will definitely be a positive catalyst for shareholders.

    Insider buying confirms my investment thesis

    Company officers and directors have been buying on the open market lately, and an institutional investor, Robert Averick just purchased a large block on the open market.

    http://ir.stockpr.com/usell/all-sec-filings/content/0001140361-14-035139/form4.html

    Robert Averick and the fund he manages own more than 10% of uSell and this additional buying is a positive indicator. From what I understand his due diligence has been thorough and all-inclusive.

    USell's financial position

    According to the last 10-Q, uSell had over $1,000,000 in cash, and no significant debt. The company has since raised $4.65 million in a registered direct offering. But what's most important is that in the past 12 months, the company has made progress in the following areas:

    Number 1: The company has grown volumes by over 75% when comparing transactions completed in the first 6 months of 2014 to the same period of 2013.

    Number 2: The company has reduced its cash used in operations from $1,222,000, to $964,000, in the same period comparison.

    Number 3: The company has reduced the marketing expense to revenue ratio from 107% to 88%, when comparing 2013 to 2012. This is a very important metric, because it has a powerful impact on profitability.

    Number 4: uSell has decreased working capital deficit from $1,269,000 on December 31, 2013 to $256,000 on June 30, 2014.

    If uSell can continue to improve in these areas, the company's inherent value will continue to increase.

    Why Michael Brauser's chairman of the board appointment is important

    Michael Brauser's presence at uSell is extremely important. He is a large shareholder with over a 9% position. Here is a short list of some of his accomplishments:

    • 1995: Sold Kertz Security Systems to Wayne Huizenga for $28 million.
    • 1998: After a series of rollups in the security business, sold company to Ameritech for $660 million (now known as ADT).
    • 2001: Sold Naviant, an internet company he built to Equifax for $135 million.
    • 2004: Sold Seisint, a data fusion company that he co-founded in 1999, to Reed Elsiver (Lexis/Nexis) for $780 million.
    • 2009: Sold 5 to 1 (an internet company) to Yahoo for $28 million.
    • 2010: Sold Interclick (an internet ad network) that he founded in 2007 to Yahoo for $280 million.

    You will notice that Michael Brauser is well-versed in developing and selling Internet companies. He would not be investing his time with uSell unless he was confident of the company's success. In my opinion, his experience, track record, and guidance will be instrumental in developing uSell into a thriving corporation.

    Why is uSell so undervalued?

    The primary reason uSell is undervalued, is that Wall Street is completely unaware of this company, or the new market uSell is serving. Investors also know nothing about the Staples or TracFone partnerships, because no announcements have been made, probably at the request of the larger companies. Most investors are also unaware of Dr. Frost's or Michael Brauser's large positions or the fact that the company has overtaken Gazelle in terms of unique visitors to the website.

    But when a company is addressing multibillion-dollar markets, and growing revenue at 40% annually, at some point, investors take notice. This is only the 2nd Seeking Alpha article on uSell, and I would expect more analyst coverage in the near future. As Wall Street realizes the value of this company, and just how much interest there is in this sector right now, the share price will rise to a more appropriate level. This is the type of opportunity that could develop from undervaluation to overvaluation within a very short time frame.

    The risk

    As with all early-stage companies, there is risk. Even though the future looks bright for uSell, there is no guarantee that management will continue to execute. We have all invested in companies that showed tremendous promise but failed because of management's inability to deliver. Michael Brauser's involvement as chairman of the board de-risks the situation some, but as with all early-stage micro caps, diligent monitoring is required.

    Gazelle's success in the marketplace presents competitive risk, but as Daniel Brauser stated, at this early stage of the cycle, Gazelle's success could actually help uSell. Competitive risk will become more of a factor as this segment of the Internet industry becomes more developed.

    From what I can determine, most investors have a cost basis higher than where uSell is currently trading so I don't see much selling pressure at this low level. This should provide a reasonable level of downside protection.

    I don't see any risk of a near-term financing, the company doesn't need cash. Since I can't predict when uSell will choose to be profitable, there could be financing risk down the road.

    Conclusion

    USell presents a particularly attractive business model, based on scalable software, no inventory expenses, and minimal infrastructure. I expect the company's 40% year-over-year revenue growth to continue and possibly accelerate. With a market cap of just $20 million, the company is deeply undervalued considering the multibillion-dollar total addressable market, and the company's ability to seamlessly expand into multiple markets. The extreme level of undervaluation and ability to turn profitable at any time, provides significant downside protection

    If uSell continues its current growth rate and is able to establish itself as the primary "Sell It Now" website, the long-term potential is staggering. Daniel Brauser believes he can build uSell into a multibillion dollar company. I agree.

    These factors, along with the presence of Dr. Frost and Michael Brauser provide investors with an ideal asymmetrical trade, significant upside potential, with limited downside risk.

    It is probable that the author and his associates have a position in the subject security consistent with the opinion expressed in this article and they reserve the right to buy and/or sell the security mentioned in this article, at any time without further notice. For complete disclosure and disclaimer information please click here.

    Disclosure: The author is long USEL.

    Sep 17 11:16 AM | Link | 3 Comments
  • Marathon Update: Shareprice Could Double Again

    When I first began writing about Marathon (OTCQB:MARA) last year, the stock was trading in the $4.50 range. By the time Seeking Alpha published my first Marathon article, it had run up to $6. It recently hit $16, and with just one large settlement announcement, it could more than double again. Here's what I like about Marathon:

    • The company has one of the best business models in the IP sector.
    • Marathon subsidiaries collectively own 128 patents and contract rights for 10 patents.
    • Gross margins are typically 45%-55%.
    • Marathon has one defendant currently scheduled for a Markman Hearing in 2014 and twenty-nine for 2015.
    • Marathon has seventeen defendants currently scheduled for trial in 2015 and four defendants currently scheduled for trial in 2016.
    • Revenue and profitability are increasing.
    • Marathon subsidiaries have 87 active defendants.
    • The company has a very low fully diluted share count of about 7 million of which half is held by insiders and affiliates.

    Marathon is entering the big leagues

    In some regards, Marathon reminds me of my VirnetX (NYSEMKT:VHC), trade. I was introduced to VirnetX by an investment banker, when it was trading at $2 a share. I established a position at $5, published my first VirnetX article at $12, and the shares rose to $40. I traded VirnetX profitably for about 2 years.

    At this point I like Marathon better than VirnetX, because not only is Marathon generating revenue and profits, but I just uncovered the fact that one of its patent portfolios, the Signal IP portfolio has estimated damages for the 13 defendants named so far to be $1.4 billion to $1.6 billion. Here's the breakdown of the preliminary damages estimate:

    Kia $133-148M

    Mazda $63-70M

    Mitsubishi $6-7M

    Nissan $151-167M

    Subaru $28-31M

    Chrysler $154-170M

    Ford $304-336M

    Volvo $13-14M

    Jaguar $20-22M

    Mercedes $120-133M

    BMW $104-115M

    VW $132-146M

    Porsche $23-25M

    Total: $1.4 billion to $1.6 billion

    Marathon has suddenly gone from a company generating profits through relatively small settlements and licensing agreements, to a company that could be generating some very big wins. The game has now changed completely. With such a small number of outstanding shares, just one big win could propel Marathon well beyond today's level.

    Positive developments in the Apple Siri case

    Additionally, the Apple Siri case has seen some positive developments recently. For example:

    • Plaintiff's motion to compel Apple's assessment of Siri's value is granted.
    • Plaintiff's motion to compel Nuance and speech recognition agreements is granted.
    • Plaintiff's motion to compel information on Apple's deferred revenue and estimated selling price related to Siri is granted.
    • Apple's request that the Court limit the number of asserted claims is denied.
    • Plaintiff's motion to compel Apple documents, statements, and testimony concerning Siri's value from the Apple versus Samsung litigation is granted.
    • Apple is sanctioned for its failure to present a witness for topics one, 2, 9, and 10.

    I am a big fan of speech recognition and use it every day. I believe this market will become larger than anyone ever expected, giving Marathon even more blue sky potential.

    The number one reason I invested in Marathon

    But with all Marathon has going for it, I invested in the company for one primary reason:

    Eric Spangenberg has become one of Marathon's largest shareholders.

    Eric is considered one of the most proficient patent monetization experts in the United States and is the founder and CEO of IPNav.

    But what's really significant is how Eric became one of Marathon's largest shareholders:

    Eric exchanged portions of his patent portfolio for Marathon stock.

    Eric obviously believes that Marathon stock will provide a greater return than his lucrative patent portfolios. His investment in Marathon is probably the greatest validation of the company's business model.

    The other reason I invested in Marathon

    Another primary reason I am a Marathon shareholder, is based on the experience and track record of Marathon CEO, Doug Croxall. After meeting with him and conducting numerous conference calls, I feel confident he can continue to lead Marathon in the successful manner that he has already demonstrated.

    Why Marathon could hit $75

    I've been adding to my position even after this huge run-up, because in my opinion Marathon could hit $75 within 6 to 12 months. Here's my analysis:

    The Signal IP portfolio has damages estimates of about $1.5 billion. If Marathon is able to monetize 10% of this number, that would generate $150 million, at least half of which should go straight to the company's bottom line. With only 7 million shares outstanding, and $75 million in earnings, that would generate about $10.71 per share in earnings. With a conservative PE of 7, that would give Marathon a shareprice of $75, just for the Signal IP portfolio.

    Part of what makes a $75 shareprice possible is Marathon's very low share count of just 7 million. Just to put things in perspective, Acacia (NASDAQ:ACTG) and VirnetX each have share counts above 50 million, more than 7 times Marathon's share count. For example, if VirnetX had a share count of 7 million, it's shareprice today would be $105.

    If we include the Apple case, the potential becomes larger, but I don't know the damage estimates for that case so I'm not including that in my estimate. And of course it's important to remember that Marathon owns 128 patents so the Signal IP portfolio will not be the only source of revenue.

    How realistic is a $75 price target? It all depends on whether or not you believe Eric Spangenberg and his team can monetize 10% of the $1.5 billion Signal IP damages estimate. Given Marathon's impressive performance thus far, some of you may argue that 10% is too conservative, and much larger numbers could be achieved.

    In terms of timing, given the experience, track record and expediency of the Marathon team, we could see multiple large settlements within the next 6 to 12 months. With 87 active defendants, settlements are inevitable. In general I consider 12 months an eternity, however if the share price goes from $14-$75 within a year, I would consider that a home run with the bases loaded.

    Conclusion

    After more than a 2X return, it's tempting to sell, but I believe Marathon could be trading above $30 by year-end. All we need is one large settlement. With minimum downside risk, and upside potential of over $75 per share, Marathon makes an ideal asymmetrical trade.

    In my opinion Eric Spangenberg, Doug Croxall, and the Marathon team could surprise investors with some large settlements and licensing agreements, and if that happens, Marathon shareholders will benefit. This team has already demonstrated its ability to monetize its patent portfolio, and given the recent developments, now we could see monetization on a much larger scale.

    Disclaimer and disclosure: It is probable that the author and his associates have a position in the subject securities consistent with the opinion expressed in this article and they reserve the right to buy and/or sell the securities mentioned in this article, at any time without further notice. For complete disclosure and disclaimer information please click here.

    Disclosure: The author is long MARA.

    Sep 16 12:31 PM | Link | 9 Comments
  • I'm Publishing 2 New Articles Next Week

    On Monday I will be publishing a brief update on a company I covered last year. The share price has more than doubled but I recently discovered information that indicates we could see the share price double again.

    The 2nd article which features a new tech company will be published on Tuesday, and is a culmination of more than 12 months of research. During this time the company's fundamentals have improved dramatically, but since Wall Street is unaware of this company, the share price is near record lows.

    This creates the ideal trading scenario; an extremely undervalued, undiscovered company, with excellent fundamentals and game changing technology. This $20 million company should be valued above $60 million today.

    Here are some of the highlights:

    • The company's business model has been validated by partnerships with Fortune 100 corporations.
    • Recent insider and institutional buying confirms undervaluation.
    • NASDAQ up listing will be a positive catalyst for shareholders.
    • 92% gross margins and low overhead give this company tremendous profit potential.
    • Strong cash position and no debt amplify undervaluation.
    • The company just reported 40% year-over-year revenue growth for Q2 and Q4 results could be considerably better.
    • This company is now receiving more unique visitors to its website than its primary competitor.
    • The company's total addressable market exceeds $100 billion annually.

    If you would like to receive trade alerts prior to publication please click here.

    Sep 12 10:28 AM | Link | 1 Comment
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