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Haki Hika is a pseudonymous contributor to Seeking Alpha and other social trading networks including StockTwits and Twitter. The persona represents the extravagant thoughts and opinions of individuals and not necessarily their RIA firm or funds managed by the individuals. Although the... More
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  • Digital Ally (DGLY): Overhyped, Overextended, And Overvalued.

    Summary:

    • Ferguson, Missouri has the nation in a tizzy over police reform. This is driving inquiries into wearable cameras up "five fold" according to CEO Stanton Ross (USA Today)
    • Mr. Ross went on in CEO fashion to say that Michigan's $1.1 million order, coupled with other sales, will push fiscal 2014 revenue to $22.5 million with more orders expected by year's end.
    • The company's legal team, in legal team fashion issued an 8k saying there can be no guarantees Mr. Ross' guidance will be realized (SEC 8k)
    • When analyzing these Overhyped plays, I prefer to take the hype at face value, but even assuming $22.5 million 2014 revenues, DGLY is currently overpriced.

    Digital Ally has a long history of overpromising and underdelivering, leaving disappointed shareholders in its wake. It is a company that unfortunately overleveraged going into the 2008 market crisis and has been treading water ever since. But for the sake of this argument, I am going to give the CEO benefit of the doubt and say that they will deliver $22.5 million 2014 revenue.

    DGLY closed Friday at 18.66, trading to a high of 19.86 and currently sits at a market cap of about $50.5m.

    I'd go into a lot of details, but when presenting our theses to the public, I prefer just to get to the conclusion as quickly as possible. Most people aren't interested in the nitty gritty and I firmly believe that if you can't explain your thesis to the average man on the street in under a minute, it probably needs some work. So let's keep it short and sweet:

    In 2009, DGLY was trading at a split adjusted price been about $18 and $22 on average. This was on $32.6 million in revenue in 2008 (realized) and as of then unrealized 2009 revenues of $26.3 million.

    (click to enlarge)

    The company currently has an accumulated deficit of $17.6 million and a history of raising money though dilution. Increasing the float to 2.7 million shares from an adjusted 1.97 million shares; An increase of 37%. In fact, just a day after the CEO came out and informed the public that the company receives many buyout offers, they raised another $4m through warrants which can be converted at any time into common (source):

    So even while Stanton Ross is busy claiming buyers or better guidance, the company is busy raising money. The companies actions contradict Ross. I won't really hold this against the company. It is just smart management to raise money when your stock is hot like it is at the moment, but it is still another case of overpromising and underdelivering.

    I digress.

    The end of the story is this:

    (click to enlarge)Source; Bloomberg

    (click to enlarge)Source: Bloomberg

    Even if DGLY is able to achieve $22.5 million 2014 revenues due to Ferguson hype, why should they trade at more than twice what they historically trade at given superior revenues? Especially given that they have a history of not being able to bring that top line down to bottom line profit. With little institutional support, do the retail public really believe that "this time will be different?"

    My investment philosophy, as those who follow me on my previous articles and on Twitter/Stocktwits know, is "Bet on what is happening; not on some hypothetical could happen." The corporate actions, despite Ross' optimistic interview is that nothing has changed. The company will continue to dilute shareholders and disappoint with underdelivery.

    Conclusion:

    Fair value for Digital Ally (NASDAQ:DGLY) assuming $22.5 million 2014 revenue is: $9.7. This number is based on trading at a 1.2x EV/Sales that DGLY has traded at on the high end the last 6 years. But again, that's assuming they actually deliver (which in this case, I think they actually probably can deliver on that guidance--the hype is real; police really do want body cams).

    After being the top trending ticker on Stocktwits many days last week with message volume up to over 3k per day from nothing and trading more than 8x the float on average the last 5 days, DGLY is overhyped.

    Currently trading at 3.4x EV/sales and 2.3x EV/guided sales, Digital Ally is about 65% overvalued.

    Up over 500% the last 10 days and again trading more than 150% of the float on average, DGLY is overextended.

    Tags: DGLY
    Aug 31 10:23 PM | Link | 2 Comments
  • Glu Mobile (GLUU) A Short Into Earnings?

    We have been bearish (and wrong) GLUU for a while now (about 2/3 weeks). We first tried a short at 6.5ish (on 7/15), and covered around 6.5ish a few days later (7/16 & 7/17) after 6.2 was unable to break (If bulls want to keep buying it up, that's fine by us; We will step aside).

    A few days later (7/21) Cowen increased their price target from $6.00 to $10.00. Stock gapped up to $7+ which is where we sit today.

    At $7, Glu Mobile has a market cap of $572m. 2013 Revenues were $106m. Cost of Revenue $37m for gross profit of about $69m. Expenses: R&D ($47m) + SG&A ($42m) + Other expenses of $1m and $1m non recurring = $91m.

    $91m - $69m = $22m net loss in 2013. But that's okay. It's a growing company. Lots of companies lose money. Just look at AMZN.

    This size loss has been holding firm for the last three years. Right around $20m lost y/y/y.

    But this year, they will likely turn their first profit. I don't deny it. Their KK game is hot, and gross profits should outweigh the losses. But how should Glu Mobile be valued? That's the question.

    KING, the big kahuna of the mobile gaming industry is valued at about 3x revenue (About $2bln in revenue and a $6bln market cap).

    ZNGA another mobile gaming is valued at about 3x revenue (About $873m in revenue and a $2.6bln market cap).

    While I don't like the mobile gaming space as a whole due to the main bearish case on any of these companies (Low barriers to entry, a history of one hit wonders, etc.), for whatever reason 3x revenue is how the industry is valued by the street.

    Indeed, even GLUU has historically been valued at 3x revenue (or less).

    2011 Revenue = $74m x 3 = $222m
    2012 Revenue = $108m x 3 = $324m
    2013 Revenue = $106m x 3 = $318m

    (click to enlarge)

    So let's say the bull case is right. Let's say their revenue looks like this:

    (click to enlarge)From: http://seekingalpha.com/article/2315565-glu-mobiles-q3-revenue-could-double-the-consensus-view

    Let's pretend they are able to do: $205m in revenue.

    3x $205m in revenue = $615m valuation.

    $615m market cap = about $7.56 per share.

    So why am I short?

    The current price of GLUU is right around $7. We have even seen $7.6. This is by our book, fully valued assuming the bull case scenario. GLUU historically trades at 3x revenue at the high end. You can look back at the chart and see that it traded at about half that throughout 2013. Further, we believe the scenario to be a bit wrong.

    For starters, Kim Kardashian is getting a cut. We don't know exactly what the cut is, I believe we will find out and if the street thinks she is being paid too much, we will sell off. Where is her cut going to come out of? Cost of Goods sold, I would argue, but it really doesn't matter where because it will end up affecting the bottom line. If it is taken from the cost of goods sold, then GLUUs margins are going to be lower than KING and ZNGA (something the street will not take kindly to). Instead of the usual 30% cost of goods sold, GLUU will higher. How much higher? That's up for debate. I would argue it could get up to 43%+ of the revenue.

    Further: KING currently trades at about 8.4x EBIT. With $22.5m in 2014 profit, we're looking at $189m valuation. Now, I don't think that's the case. KING has shown itself to be a one hit deal, while GLUU has shown that it is the grinder. Game after game, different genres, styles, etc. To get their revenue. So I think trading higher is fair. But at $7.56, that would be an EBIT of 27x. A bit high IMO. What I think is fair, doesn't matter though.

    My point here is that the optimistic scenario is already baked into the price. And what's more, the KK game won't even be in the Q's numbers. It will be in the guidance, though.

    With little upside left, I believe GLUU will end up being a case of buy the rumor, sell the news. Which is why we are short and will most likely be so into the earnings report.

    **Author's Edit**: As has been pointed out in the comments below, there was some dilution since the shares outstanding I used. In my graphic below, instead of $7.56/share, that should be $6.74/share (3x revenue). $205m * 3 = $615. $615m / 91.2m shares outstanding = $6.74/share. This will also change a number of other places if you want updated numbers. But the points are all the same.

    Disclosure: The author is short GLUU.

    Additional disclosure: The ideas and market views discussed in the article are solely the opinion of the individual writing them. They do not necessarily represent the market view or recommendation of the individual's registered advisory firm, and there may be conflicts of interest between the advisory firm's clients and readers of the article. The individual does plan to buy/sell some of the securities mentioned above in either his or his clients accounts, but may or may not buy/sell any of the securities within 72 hours. Readers may or may not be informed of any decision that Haki makes regarding some or all of the ideas above.The trading of securities may not be suitable for all potential users of the Service. You should be aware of the risks inherent in the stock market. Past performance does not guarantee or imply future success. You cannot assume that profits or gains will be realized. The purchase or short sale of securities discussed may result in the loss of some or all of any investment made. In the case of short selling it can result in losses in excess of the full investment. We recommend that you consult a stockbroker or financial adviser before buying or selling securities, or making any investment decisions. You assume the entire cost and risk of any investing and/or trading you choose to undertake.

    Jul 29 2:29 PM | Link | 10 Comments
  • Using Sentiment To Fade (ZNGA Trade Review)

    Everyone knows Zynga (NASDAQ:ZNGA). It's a favorite of retail traders everywhere even though it has been dead money for almost a full year now. Perhaps that's because during it's reign as the dead money king it has put in 10% moves in either direction only to revert back to the mean.

    But what do you expect form a company with over a billion in cash on the books, running net losses, and no good ideas in the pipeline. Zynga is a company that acquired other companies for growth, but with social/mobile companies seeing the social bubble at the moment, why sell to Zynga for pennies, when they could go to Facebook or Google and make billions (or turn down billions, I'm looking at you, Snapchat).

    So when Zynga put in a 28% move from November 12 to November 21 (7 trading days), and people were just starting to get bullish, it caught my eye. Some smart traders had already been bullish from $4 and were exiting $4.4 (Scott from T3 traders comes to mind). However, as I looked to my sentiment gauges (twitter, stocktwits, some of the traders on my floor *cough* *cough*) many people were just starting to turn bullish and buying at $4.4 for a move to the high $4 and even $5.

    So here's the picture: Zynga had extreme sentiment. Message volume in Zynga was peaking. And retail traders were buying ahead of a breakout at $4.55 for an expected move to the high $4s or $5 level.

    When you see retail traders (or other retail traders as the case may be) buying an issue for an expected breakout after the issue has already put in a measured move, it's time to run.

    So I decide to take the other side of the trade. I post much of my idea flow to Twitter/Stocktwits to share how our fund tends to analyze short or long term trades. Obviously we don't post all our ideas or all our trades, but we do post on a small "social" account that is easy to keep it liquid in the names. Here's what I wrote on November 22nd after a 28% move in 7 trading days.

    (click to enlarge)

    Then I posted the order entry and when it was filled nine minutes later:

    (click to enlarge)

    Immediately, I got people responding to my tweets saying that I was crazy, or I was in trouble. This is confirmation to me that I may be onto something with this trade. People are emotionally invested in this breakout (which means that price action will likely shake them out).

    (click to enlarge)

    (click to enlarge)

    In these tweets that I received in regards to my Zynga short (not TTWO), I can see my competition and a lot of these people are either making common retail mistakes or recommending I make retail mistakes, but more on that later.

    When price failed to break above 4.55 over the next four days, but failed to break below 4.4, it was beginning to look like consolidation. The price action even made it look like Zynga may break over 4.55. However, on 11/27/2013, there was a massive seller at 4.55, so I shorted 4.54, 4.53, and 4.52, pushing into it. There were other institutional sellers at 4.55 level, and retail traders were getting long for the breakout.

    (click to enlarge)

    I still wasn't sure about the trade, as you can see, there was a high probability I would have decided to cover. If other institutional traders were buying at 4.55 for the breakout, I would have exited. However, it was still at that point only retail money pouring in.

    Over the last few days, Zynga has pulled back and while the chart looks like a nice simple pull back to the 20 day moving average after a bullish move (it has pulled back 10%!) People on Twitter and Stocktwits continued to "hope" for the turnaround. Even at 4.35, people were saying "Zynga will be over 4.55 today!" or "Bear raid will be over soon." "Shorties going to have to cover soon!" the whole nine yards that you expect from the drudge that is retail social stock trading. Here are some examples:

    (click to enlarge)

    (click to enlarge)

    But today, the sentiment kind of changed. Now there were some annoying bears (ignore 7777 or whatever his name is). But there were also some bulls who were starting to get a bit tired of being down.

    (click to enlarge)

    And so, because I had an oversized position (8% short vs. the original 4%) and because ZNGA is down more than 10% from my entry, I took this as a sign to cover half the position at the intraday fib extension from the morning range at 4.11.

    (click to enlarge)

    And about 4 1/2 hours later, I got filled.

    (click to enlarge)

    I still hold Zynga short and my next target is around 3.9 (5% more--crazy because that move can happen in a day). But I wrote this review because I wanted to give an overhead view of what I saw, and how I analyzed the trade for people who follow my stream. Can't exactly show all this on the stocktwits or twitter platform. Hope some people find the ideas that I mentioned helpful in their effort to learn how to navigate the market.

    Disclosure: I am short ZNGA.

    Additional disclosure: I also may cover within the next 72 hours.

    Tags: ZNGA
    Dec 03 9:10 PM | Link | 6 Comments
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