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Edward Vranic, CFA
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I am a private investor based out of Toronto, Canada and I have been investing since 2003. After 8 years in Corporate Finance with a Canadian Telecom company I have decided to dedicate myself full-time to the capital markets. I write on Seeking Alpha to demonstrate my financial analysis and... More
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  • Mobio INsider Could Be The Next Generation Of Twitter  5 comments
    Dec 23, 2013 9:38 AM | about stocks: LXVTF, FB, TWTR

    With the recent IPO of Twitter (NYSE:TWTR) and great 2013 for Facebook (NASDAQ:FB) and its stock's performance, these two social media applications have grown to a combined market cap of over $150 billion thanks to the expectation that they will make a lot of money through advertising on their sites. While those companies are expected to make a fortune, they are making it on the backs of their dedicated and most popular users. Some users, in particular celebrities, are missing out on a huge chunk of potential earnings. The Time article entitled "This Is How Much Money Twitter Owes You" attempts to estimate the value of an individual's Twitter feed. For instance, Barack Obama is estimated to be owed over $5 million.

    If you believe that an application which pays you to use it if you are widely followed is the future of social media, then you'll agree that Mobio INsider could be the next generation of Twitter. This also means that companies like Twitter and Facebook may not have such an easy path to riches as people think. Smart, nimble and aggressive companies like Mobio will look to carve out niches and chip away at the two larger social media companies' user bases and earning power.

    The parent company of Mobio is LX Ventures (OTCQX:LXVTF) which trades actively in Canada on the TSX Venture Exchange under the symbol LXV. I was first made aware of the Mobio platform and its potential through this article from Stockhouse. I was very skeptical at first since I had seen this same social media song and dance from another company two years earlier. That company's stock price had substantial gains in early 2011, but a vague business plan and thus far unsuccessful monetization of its assets has caused the stock to drop nearly 99% from its all-time high in April 2011.

    Despite all that, I decided to give Mobio and LXV a fair shot this week. I tried out the Mobio INsider platform and read through LXV's documents on SEDAR and I was quite impressed. There are five differences between the company from 2011 and LXV and Mobio today that lead me to believe that Mobio has a really good shot of becoming the next big social media outlet and a serious threat to the way Twitter and Facebook do business.

    1. Mobio's website statistics suggest that target market is being reached very quickly and that the app is being used as intended.

    The Mobio INsider site has been live since December 1st, 2013. Reviewing its Alexa ranking as of December 23rd, it has risen from being around the 5 millionth ranked website in the world to #338,817. Keep in mind that Alexa's rank is based off of the past three months of data and this site has been live and highly active for only three weeks. This post on Stockhouse shows that its ranking is improving at an outstanding pace as on December 19th it was 449,110 and on December 18th it was 593,720.

    The site performance statistics are also trending in a positive direction. The bounce rate has plummeted to 41.9%, the daily page views per visitor is up to 2.8 and the daily time on site is up to 2:32. The Alexa stats for Twitter shows a bounce rate of 31.7%, page views per visitor of 5.7 and daily time on site of just over 9 minutes. The Twitter stats are superior, but again remember that Mobio INsider has been live for three weeks. Mobio's page views are up 180% according to Alexa, meaning they started out at 1 during the pre-launch phase. StuffGate's mobioinsider.com rankings shows the 1-month page views at just under 4. I believe the average site statistics will trend closely to Twitter's as time goes on.

    Another important item to note is where the traffic to Mobio INsider is coming from. Two of the top three upstream sites belong to Twitter, with the other belonging to Facebook. Nearly two-thirds of the traffic is coming from exactly from where Mobio's management team would want it to come from - Twitter and Facebook users.

    2. Mobio is gaining media attention outside of the investment world.

    A potential problem with these social media start up companies that are publicly listed is that their membership or attention is from the small sect of the investment community that believes in them as opposed to gaining traction with real life media outlets.

    Despite all the buzz around Mobio and LXV in the Canadian small cap investment community, there's been plenty of mainstream media attention on Mobio which had absolutely nothing to do with LXV the stock ticker. Two examples include this article titled "New Service Helps Celebrities Make Money From Social Media" from The Hollywood Reporter and the Wetpaint article mentioning Paul Wesley's addition to Mobio INsider.

    Mobio INsider has over 15K followers on Twitter and over 22K likes on Facebook. Some of these will be investors in LXV, but the majority of the followers on Twitter are people from around the world who appear to have an interest in the app's capability and buzz around their favorite star and not its investment potential.

    3. The revenue model is effective and easy to understand.

    One of the biggest challenges investors face when investing in these social media startups as well as many other businesses is understanding how exactly they make money. With Mobio INsider you can get the gist of how the business model works after just a few minutes of review. The basic premise of Mobio is that an "influencer", who is a celebrity with a large following, answers the most popular questions asked by his or her audience.

    If you view the Kim Kardashian page and scroll down for a few questions, you will see occasionally that a response is covered by the term "Watch ad to reveal".

    (click to enlarge)

    After watching the ad you are taken to the answer. This concept is an effective one in my opinion as it encourages active engagement by the user, similar to a YouTube video with an ad placed at the beginning. It is not a passive type of ad targeting system like other web pages where the user can gloss over the page and ignore sidebars or headers. The user will have a specific goal of reading that covered answer and will view the ad to get to it. Referring back to the Stockhouse article I will quote one of the key points made that could make the Mobio business model the way of the future for social media:

    "The industry standard for display advertising is estimated near 0.5% and Mobio tests to date have shown advertising unit engagement near 35%."

    If Mobio INsider can maintain this 70x improvement on its user advertising engagement over the industry, then advertisers will flock to the app and pay a vast premium over normal social media sites. Even if they can't maintain 70 times but 5 or 10 times the average result, advertising space on Mobio will come at a premium price.

    Any revenue that is generated from the showing of an ad is split between the influencer and the company. The ads are seldom seen at this time but again keep in mind that the site is only three weeks old since going live. Although it's pretty clear what Mobio is trying to do, as the application grows in popularity and the number of advertisers increases, we will gain a better understanding of exactly how often the company will place ads over the responses to the questions or if they have any other ideas on how to extract more revenue from the site.

    4. The business model has the potential to expand well beyond its current purpose.

    One early complaint about this app thus far is that it has procured primarily "B-list" celebrities. People must keep in mind what this application does. Is a celebrity that is earning millions of dollars a year going to be an active user of Mobio right at the start, for several thousand dollars a year? Not likely. It will be an uphill battle to get "A-list" celebrities to use Mobio at this stage. Should Mobio INsider grow to the point where there is serious potential to earn a 6 or 7-digit figure just from the ads produced from answering fan questions, then you will see widespread industry adoption. By then Mobio would have captured a significant portion of the Twitter universe and would likely be valued as such. To wait until "A-list" celebrities are on board with Mobio before taking a serious look at the company will risk missing out on a low stock price for LXV. An exception to the rule would be any top celebrities who truly enjoy an interactive experience with fans and who don't really care that much about the additional income stream.

    The best opportunity for Mobio to increase its user base while in its early growth stage is in those "B-list" celebrities or those in semi-retirement or past their prime. There are two basic aspects of human nature in which Mobio INsider can feed off of very well - the need to feel wanted or important and the need for a revenue stream. Any former celebrity who wants to relive their past glory days or who did not spend their money wisely and is in need of an income source will flock to this type of interactive and lucrative endeavor. Think along the lines of a retired sports star who charges for autograph signings today or an actor from the 80's who would participate in celebrity boxing. This niche will be the bread and butter for Mobio INsider in the near term.

    The other side of that is the audience. The company's stated target market is teenagers who are after their favorite youth-oriented celebrity however I believe the largest audience potential is the Baby Boomer generation. Many of them are retired or will be retiring soon and have a lot more extra time on their hands. While some at first would scoff at the idea of spending their leisure time chasing celebrities, I believe many of them would use the Mobio INsider app quite frequently as a guilty pleasure.

    If you are in the Baby Boomer demographic (or have a family member who is of that generation), how often have you been glued to the TV set when a "where are they now" type of documentary of a celebrity from the 70's or 80's comes up? I have personally seen it with people I know from this generation and I can say that their loyalty and interest in the celebrity of their youth may even surpass that of the teens today.

    A Baby Boomer generation interested in the stars of their youth coupled with those old stars who want to relive the days when they were at the height of their popularity and make extra income for doing so makes a potent combination that Mobio INsider can exploit.

    While Mobio INsider is designed for celebrities as influencers, there is a great opportunity to expand that to anyone who has a large Twitter following at some point. A sports writer who is known to be the first to break the news on the latest baseball trade, an entertainment columnist who knows all the celebrity rumors or a highly-followed investor or analyst who has winning stock picks could all benefit financially from Mobio INsider and they would be the types of "average" people who would be particularly interested in supplementing their income.

    5. Successful leadership.

    The CEO of LX Ventures is Mike Edwards, one of the more successful and daring CEOs in Canada. He has over 20 years experience in building businesses. He has applied the lessons learned from his early years of having mixed results while being a leader to becoming an internet millionaire through the development and eventual buyout of AreaConnect. His mission for LX Ventures is to turn it into a billion dollar company.

    What does this mean for Twitter and Facebook?

    As Mobio INsider grows in popularity, its revenue sharing model could put a dent into how Twitter and Facebook do business. These companies have shown that they are aggressive when attempting to buy out small startups in the social media world. Facebook offered $3 billion for Snapchat and got turned down. In two years of being live, Snapchat has not made any revenue.

    In the short term, Mobio is not much of a financial threat to the big players. But nearly every day the company is signing up celebrities with recent additions like Tyler Blackburn and Kendall Jenner having cited reasons such as being able to engage more closely with their fans. Lil Wayne has been quite active in promoting Mobio on Facebook. A small group of highly engaged celebrities which Mobio INsider already has would be enough to convince more celebrities to join to get the ball rolling.

    From there it all depends on how the celebrities wish to engage their fans and how active they plan to be on Mobio. If they use Mobio in conjunction with Twitter then time will be split between the two platforms. Twitter will lose some page views and audience but not likely enough to get it to alter its business model. If celebrities decide to use Mobio as a primary source for their communication, Twitter could lose a substantial portion of its pageviews. Other platforms could also come along with their own niche in the revenue sharing social media world and provide further competition for users' time away from Twitter or Facebook.

    Both social media giants may be forced to change their business models into a revenue sharing one which could put downside pressure on the very high valuations that they currently have. According to Yahoo Finance, at a stock price of $60, Twitter has a price to sales ratio of 59 with negative net earnings expected for 2014. Facebook is more reasonably valued at a $55 stock price with a price to sales ratio of 20 and a forward price to earnings ratio of 49. Both of these valuations price in a substantial growth in net earnings. To put it into context, my article on the Chinese eCommerce industry earlier this month shows that online retail sales in China are expected to grow by nearly 8 times from 2012 to 2020, but companies in the industry like E-Commerce China Dangdang Inc. (NYSE:DANG) has a price to sales ratio of 0.8x and Fireswirl Technologies (OTC:FRWRF) has a price to sales ratio of 0.3x at 25 cents. The social media giants having multiples on revenue that are much higher than another rapidly growing industry like Chinese eCommerce shows that there are expectations of them being able to monetize their social media businesses at high margins. If Twitter or Facebook are forced to implement a revenue sharing program to maintain their market share, that will directly eat away at their bottom line.

    For those interested in investing in social media, I would suggest startups like LX Ventures which are riskier but are also valued at much lower market caps. They have a lot more room for growth than the social media giants and would represent the better risk to reward profile. For those not interested in small cap ventures, I would suggest avoiding Twitter and Facebook altogether at these prices and focus on other strong growth industries instead where valuations don't imply such a high rate of future success.

    How much are LX Ventures and Mobio INsider worth?

    I believe Mike Edwards' mission to turn LX Ventures into a billion dollar company is quite achievable. While Mobio is its top priority at the moment, LXV actually owns several similar businesses. However, to keep this analysis simple I will not attempt to place a value on those subsidiaries and will focus on Mobio.

    In addition to Snapchat rejecting Facebook's offer, management also rejected two rumored offers from Google and another company for $4 billion as the CEO expects to have much higher valuations for the company next year. If Snapchat is purchased for greater than $5 billion, that would make an extremely bullish comparable for Mobio.

    One crude way of determining Mobio's value relative to Snapchat is to compare the relative value of their websites. While website valuation services online are not often taken seriously, they can provide a basis for how one company's traffic fares to another. Snapchat's Alexa ranking is 8,657 as of December 23rd, and snapchat.com derives a value of $115K according to mywebsiteworth.com. The same website values mobioinsider.com at $3K. Using other website valuation tools provides widely varying absolute results, but the relative valuation is about the same. Mobio INsider is worth about 2-3% of Snapchat according to the traffic each drives to their respective site. If Snapchat is worth more than $4 billion right now, then Mobio should be worth 2-3% of that which is at least $80 to $120 million.

    Not every user interested in Snapchat would have to go to its website as the app can be downloaded from Google Play and Apple's app store while Mobio's prime use is currently only through the Mobio INsider website. But we are also comparing a service that has been live for two years in Snapchat to one that has been live for three weeks in Mobio INsider. Mobio has a good chance to claim a much higher portion of social media traffic even in the next three months as it continues to sign up celebrities and the site gains organic growth.

    LXV currently has 62 million shares outstanding with a market cap of $33 million at a 53 cent share price. The $80 to $120 million valuation when compared to Snapchat would put it at a price of well over a buck but the company is in a growth stage at this point in time and accepting a buyout for the Mobio subsidiary this early would be unlikely.

    Reviewing LXV's audited financial statements from November 28th on SEDAR shows that the company has $30K in revenue with $1.7M in net losses for its fiscal 2013 with much of that coming in Q4 thanks to its recent acquisitions. It did a $3 million financing in November but in all likelihood it will need more cash as it grows Mobio and its other subsidiaries and acquires more businesses.

    The Mobio INsider website will eventually need to be revamped as it grows in popularity. Its current structure won't be able to support a high amount of users and traffic efficiently. For instance, the main page shows all of the influencers currently signed up. For a few dozen people this display works well. But for hundreds or thousands this would not be an efficient display method. Basic tools like an expanded search function and spell check should also be added, all of which will cost money to develop. How much money really depends on how efficiently the company is run. The financials show a burn rate that is not too high, but they are only up to the end of July, well before the ramp up to Mobio going live.

    My estimate is that the company could need anywhere between $25 million and $100 million in the next couple of years in order become the social media giant that it aspires to be. Some of that will come through the exercise of outstanding warrants but the bulk will come from new financing. That means the fully diluted share count will be anywhere between 100 million and 250 million. Given the money being thrown at Snapchat so soon after its birth, the unique niche of Mobio which I think will be very successful and the early adoption rates and buzz around Mobio INsider after only three weeks I believe Mobio has a good chance to become the next billion dollar social media empire. Assuming a share count of 100 to 250 million, that would make LX Ventures valued at anywhere between $4 to $10 per share with a higher stock price quite possible if Mobio can grow to Snapchat's multi-billion dollar worth. LXV is an excellent mid-to-long term speculative investment for those investors with higher risk tolerance who believe that a revenue sharing model between a platform and its users will be the next generation of social media.

    Disclosure: I am long LXVTF.

    Stocks: LXVTF, FB, TWTR
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Comments (5)
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  • Edward Vranic, CFA
    , contributor
    Comments (1060) | Send Message
     
    Author’s reply » This article did not make SA's requirements for a stock with at least $1 in price or $100m in market cap. I will submit it as an article when it does.
    23 Dec 2013, 09:43 AM Reply Like
  • gregbent
    , contributor
    Comments (39) | Send Message
     
    Thanks for the Analysis. Have seen the recent Alexa Rankings now ? Certainly the valuation would be much higher. Also, once Copper (Cloud services) closes - management is talking about $500k monthly run rate or $6 million per year, sometime in 2015. Copper alone would be worth LXV's share price. DropBox just did another round of financing at a $10B valuation. Lots of excitement in Canadian Tech land. Most of the 52 week highs are in Tech and BioTech. Canada is more than resources.
    19 Jan 2014, 07:12 PM Reply Like
  • Edward Vranic, CFA
    , contributor
    Comments (1060) | Send Message
     
    Author’s reply » Thanks for the comment Greg. The increase in ranking is definitely a good sign. I have a bunch of great tech and biotech picks as well that I might blog about one day.
    20 Jan 2014, 11:45 PM Reply Like
  • Edward Vranic, CFA
    , contributor
    Comments (1060) | Send Message
     
    Author’s reply » Here's an interesting blog that keeps track of Mobio's Alexa rank and compares it to other companies.

     

    http://bit.ly/1lw4fjX
    3 Feb 2014, 01:03 AM Reply Like
  • Edward Vranic, CFA
    , contributor
    Comments (1060) | Send Message
     
    Author’s reply » My latest page on Mobio:

     

    http://bit.ly/1qrC0mF
    11 Mar 2014, 01:55 AM Reply Like
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