Michael Goode

Microcap Ideas: Photochannel Networks

Well, so far I've been right. :)

I covered my short before the stock fell much, though, so I didn't profit from being right.

Microcap Ideas: Photochannel Networks

How is this a value stock? The company is trading at an absurd P/S ratio (even assuming the Costco contract doubles revenues, the forward P/S is still 4.6, and the company continues to lose huge sums of money), and last I checked, this business is highly competitive and it is DYING! Everybody and their mother now owns a photo printer. Online / mail-order services such as Shutterfly are cheap and high-quality. There has been a clear progression in the industry from everyone going to the photo developer to people printing photos themselves. Sending digital photos to be printed by a store is an interim stage that will see gradual but steady declines in volume over the next decade. Back while in college I worked at an independent photo shop that experienced the digital transition, so I have some understanding of the economics at work here.

Even if Photochannel continues to grow sales, earnings will likely never amount to much because this is a low-margin business. All Photochannel does is offer a website back-end. There are many other companies that have similar programs (such as the aforementioned Shutterfly). There is no reason to believe that Photochannel can outcompete them.

For example, from the company's last 6k, network costs and sales and marketing ate up 61% of revenue. So the company's gross margin is about 39%. Once you add in the necessary high R&D expenses and the G&A expenses, there is little hope for a double digit net margin. I do not believe that Photochannel is an attractive investment at these prices and in fact I am betting against it.

(www.sec.gov/Archives/e...)

Disclosure: I am short Photochannel (PNWIF).