Viggle (VGGL) is a name that I have been following for several years after I became aware of the app in early 2013. The stock has done poorly since its IPO (uplisting) in late April, however, I believe that the stock is currently an excellent short as the company is struggling to gain traction with users and the stock has been promoted by several "pump and dump" newsletters.
Background and Overview
Viggle is a publicly traded media company that recently uplisted to NASDAQ. The company's history as highlighted in the 2012 10-K
February 7, 2011, Viggle Inc. (formerly Function Inc., Function (X) Inc., and Gateway Industries, Inc., the "Company") entered into the Agreement and Plan of Recapitalization (the "Recapitalization Agreement", a copy of which is listed as and incorporated by reference herewith as Exhibit 10.1) by and among the Company, Sillerman Investment Company LLC, a Delaware limited liability company ("Sillerman"), and EMH Howard LLC, a New York limited liability company ("EMH Howard").
According to Viggle, the company has the simple business model of "Watch TV, Earn Rewards." The company provided this chart to show how it works.
The business model is simple, and seems like an interesting idea, but serious questions about its ability to generate profits and attract users remain. While the business model is simple, it is also unprofitable. And with signs that user acquisition, a key driver of revenue growth, is slowing Viggle is left in a very precarious situation.
On Thursday morning the promotion started with several stock promoters sending out emails, one of which linked to this research report. You can see a list of each promotion here on StockPromoters.com, a useful source for tracking stock promotion. Here is what one of the emails looked like.
The email highlighted a low float, insider buying, the experience of CEO Robert F.X. Fillerman, a deal with DirecTV, and the hot sector with "potential buyout written all over it." At the end of the email in fine print reads:
All information on featured companies is provided by the companies profiled through their website, news releases, and corporate filings, or is available from public sources andSmallCapStreet.com makes no representations, warranties or guarantees as to the accuracy or completeness of the disclosure by the profiled companies. Smallcapstreet.com has been compensated twenty thousand dollars via bank wire by Hunter Marketing for media services of VGGL. Further SmallCapStreet.com has no advance knowledge of any future events of the profiled companies which includes, but is not limited to, news & press releases, changes in corporate structure, or changes in share structure.
That type of language is entirely expected in these type of situations but it is a red flag. The Small Cap Street name is familiar to me, and not just because I follow the microcap space closely. On May 21st "The Pump Stopper" published this fine article on Provectus (NYSEMKT:PVCT) calling it a short and highlighting numerous issues. When The Pump Stopper published the article on PVCT it was trading at $2.67 a share, PVCT is now trading at $.72 share after the company's BTD PV-10 application was declined by the FDA. The stock was halted and opened at around $.30 after the halt. In one section of the article The Pump Stopper wrote:
PVCT is connected to questionable stock pumpers promoting PVCT including Small-Cap Street LLC. Multiple stocks covered by Small Cap Street LLC have recently been halted by the SEC and I believe PVCT could be next to be halted given its weak disclosures and zero revenue.
Well guess who is promoting Viggle? That's correct, Small Cap Street, LLC.
The SEC has been cracking down on stock promotions recently. As The Pump Stopper pointed out, several of the stock halted after the SEC cracked down on recent promotions were associated with Small Cap Street. The Pump Stopper highlights:
- FusionPharm Inc. - promoted by Paul Lipp's OTCbbjournal.com - HALTED BY SEC
- Cannabusiness Group Inc
- Growlife, Inc. - promoted by Mark Bonacci Paul Lipp's "SmallCapIR" - HALTED BY SEC
- Advanced Cannabis Solutions, Inc
- Petrotech Oil and Gas, Inc. - promoted by Paul Lipp's "StocksImpossible" - HALTED BY SEC
Of these 5 that the SEC stepped in and stopped, 3 of them were recently covered by Paul Lipp's Small Cap Street stock promotion firm.
So we have established that the stock has been promoted by a promoter that has sketchy ties to several stocks that were halted recently and dropped significantly. Another key point that the promotions make is highlight CEO and Chairman of Viggle Robert FX Sillerman. This is Mr. Sillerman.
This is him flicking off a camera after getting off of a flight in Miami. Mr. Sillerman is also the CEO of publicly traded SFX Entertainment (NASDAQ:SFXE). You might have heard Mr. Sillerman's name in the news on the Q4 SFXE conference call when he said the following. Doug Mitchelson, an analyst at Deutsche Bank asked
"And lastly, Bob, I'm not even sort of sure how to ask this question … we understand that you're something of a non-traditional CEO, but any comment you want to make on the gestures you were making? Was that to a specific person or to everybody as you came out of the plane yesterday? We're just trying to make sure that you're still sane."
Mr. Sillerman responded by saying:
"Um, well - thank you for referring to me as a non-traditional CEO," Sillerman began, explaining: "That was a result of an internal, the culmination of an internal conversation and joke within the company, and while I certainly wasn't crazy about the fact that it was tweeted out, it's had a very interesting reaction from the uh, music community down here, (which) has fundamentally said, 'F--- yeah, we get it.'"
But that has little to do with Viggle, other than to highlight that he is an unconventional CEO. Several of the promotions highlight that Mr. Sillerman has lead many publicly traded companies. Specifically one promotions reads "CEO Robert F.X. Sillerman has built and sold companies for billions." While that may be true, I think Viggle shareholders would be better served to examine his track record at other publicly traded companies that he was involved with. The original Viggle S-1 highlights some of Mr. Sillerman's past ventures.
Robert F.X. Sillerman was elected a Director of the Company and Executive Chairman of the Board of Directors effective as of the closing of the Recapitalization. He has, since January 2008, served as Chairman and Chief Executive Officer of Circle Entertainment Inc. Mr. Sillerman also served as the Chief Executive Officer and Chairman of CKX from February 2005 until May 2010. From August 2000 to February 2005, Mr. Sillerman was Chairman of FXM, Inc., a private investment firm. Mr. Sillerman is the founder and has served as managing member of FXM Asset Management LLC, the managing member of MJX Asset Management, a company principally engaged in the management of collateralized loan obligation funds, from November 2003 through April 2010. Prior to that, Mr. Sillerman served as the Executive Chairman, a Member of the Office of the Chairman and a director of SFX Entertainment, Inc., from its formation in December 1997 through its sale to Clear Channel Communications in August 2000.
While it is clear that Mr. Sillerman has a long track record in the industry, and that he has generated substantial personal wealth for himself (in 2005 Forbes named him the 375th richest America, with a net worth of $975 million), shareholders in his publicly traded companies, however, have not done as well.
SFX Entertainment: Mr. Sillerman is the CEO and Chairman. The company went public in October 2013 and the IPO priced at $13/ share, closed at $11/ share that day, and currently trades at $7.30/ share. The stock is down 38% since its debut.
Circle Entertainment Inc. (OTCPK:CEXE): At Circle Entertainment Mr. Sillerman was named CEO and Chairman in 2008. Circle Entertainment is focused on the development of location based entertainment business. The company has not generated any revenue and currently trades at $.03. The stock is down almost 100% since Mr. Sillerman took over.
CKX, Inc (NASDAQ:CKXE): Mr. Sillerman served as CEO and Chairman from 2005 until 2010 at CKX. CKX was perhaps the most rewarding for shareholders, as it was taken private around $5/ share in 2010. By that time many shareholders were likely underwater. The stock traded as high as $30/ share in 2005. (I could not find a chart available for CKX)
There is another publicly traded company that Mr. Sillerman was involved with, although not on the management level. In 2007 Mr. Sillerman led a group to take Riviera Holdings private at $27/ share. For whatever reason, the deal did not go through. In July 2010 Riviera Holdings filed for bankruptcy.
Active User Growth is Already Slowing
For a young, high growth company, you want to see sustained user growth. The opposite is happening at Viggle, as it appears that registered active user growth has already slowed significantly.
Source: Company filings
After initially exhibiting strong user growth, that growth has slowed to around 10% on a QoQ basis rather quickly.
Declining User Engagement
Given that increasing user engagement is one of the key growth strategies for Viggle, an investor would like to see engagement increasing. Instead it is decreasing rapidly and Viggle is disclosing less and less key metrics. Here are the user engagement metrics that they have consistently reported from the quarter ending 6/30/12 (~6 months after the app launched) to the quarter ending 3/31/2014, when the most recent 10-Q was filed.
Source: Company filings
As you can see the time spent within the app (red line) has been decreasing steadily since the launch. MAUs (monthly active users) grew initially but peaked during the summer of 2013. Additionally Viggle initially reported more engagement metrics, but has since ceased reporting several user engagement metrics that it used to report.
Decreased Disclosure Of Engagement Metrics
Source: Company filings
As you can see above, Viggle no longer reports user engagement metrics such as Engagements/Day and Average Days Active when they report the user engagement metrics. While MAUs and Time within app per session are likely enough to gauge that user engagement is in a downtrend, it does show that Viggle is giving investors less material to work with to come to that conclusion.
What Do Employees Say?
One good source of information for how a company is doing and treating its employees is Glassdoor.com. For those of you that do not know, Glassdoor allows employees to anonymously rank and rate the company that they work at and leave suggestions for how to improve it. Based on Glassdoor.com ratings, the company gets 3.1 stars on average, while only 60% of reviewers approve of CEO Robert Sillerman and only 50% would recommend the company to a friend. While some reviews were positive, there were some very bad reviews. One employee called it "The worst company of all time," and a "sinking ship." Others highlighted a lack of trust between engineers and management." Most of the positive reviews said that there was a smart team in place at Viggle and that it was a good atmosphere to work in. The negative reviews said that the talented people were leaving fast and that the product no longer worked well and that the user base was plummeting.
FINRA Has A Scam Meter, So Let's Use It
FINRA has a "Scam Meter" which they provide on their website for free, so I figured I would run through it from the point of view of someone who received an email from Small Cap Street promoting Viggle.
It was trading around $5.50 when the email hit. The stock wasn't under $5/ share when the promotion started as it was a few weeks before, so "None of the above" was the right answer.
The email from Small Cap Street was not unsolicited, but other promoters' emails could have been unsolicited.
"Low Float!" "Insider buying by Mr. Sillerman who has bought and sold companies for billions!" Note: By definition, a low float means that there are not many shares left for the public to trade. Low float stocks often see rapid price increases, as traders can easily bid up the shares.
According to the disclosure in the email Small Cap Street…
"Neither SmallCapStreet.com nor any of its employees, affiliates, subsidiaries or family members are registered investment advisors or registered stock brokers and shall not be liable for any direct, indirect, incidental, special or consequential damages arising out of or resulting from the use or inability to use this site."
The result of that short quiz was three out of four red flags. Not that this means that Viggle is a scam, but look at who is promoting it.
My Viggle short is not driven by the quality, or lack thereof, of the balance sheet. It is worth noting that the balance sheet is not particularly strong.
Viggle only has about $1.4 million in cash on hand; this was before the IPO, however. The IPO raised $16 million in working capital and "general corporate purposes." (The rest went to debt repayment, and sales and marketing.)
Viggle has stated that it will need $13 million to finance its one year vision for the company. Viggle said:
Our current plan will require capital of approximately $13,000,000 over the next 12-month period to cover the fixed expenses and capital needs of our company, including employee payroll, marketing expenditures, server capacity, research and development, office space and capital expenditures. As of the filing of this prospectus, we have no availability to draw on our credit lines to fund our operations, nor do we expect to have any availability subsequent to the offering. Therefore, we do not plan to rely on debt financing to meet our capital needs for the next 12 months. In order to meet our capital requirements for the next 12 months, we anticipate that we will need approximately $13,000,000 in new capital (in excess of the cash currently held by us).
So with the IPO proceeds, Viggle got the $13 million they needed. What they will do next year or how that money will be used I do not know. Another potential negative is that they will have to write down some of the Goodwill from acquisitions that they have made. The large jump in Goodwill stands out as one of the apps they acquired had users, but not much else.
If after all of that you are still bullish on Viggle, consider the fact that Viggle has lost $50 million in the last nine months. In 2012 Viggle lost $96 million. In 2013 Viggle lost $91 million. Compare that to its current market cap of around $80 million. It is difficult to value Viggle considering that it has negative earnings and negative EBITDA and nominal revenues, but here is my brief attempt. Viggle generated 17.26 million in revenues in the last 12 months. Given its declining user base I do not expect that number to grow much over the next 12 months. With a current market cap of $79 million, that puts Viggle's P/S ratio at 4.59. The average P/S ratio for the S&P 500 is 1.56 while the average P/S ratio for entertainment stocks is 2.48. My base case has Viggle's multiple rerating to the average of the entertainment stock, which would have Viggle trading at $3.09, implying 46% downside. My bear case has Viggle's P/S ratio rerating to the average of 1.56. I think this is generous considering all the red flags here. In this case a 1.56 P/S ratio would imply a stock price of $1.95 and 66% downside from current levels.
Note: I have contacted Viggle about my concerns and have not heard back. If I do hear back from Viggle, I will update this article with any new information.
UPDATE: I spoke to Small Cap Street, and he said that they have never promoted (to their subscribers and followers), nor had they been paid to promote in any way PVCT, FSPM, CBGI, CANN, or PHOT. He said that those reports were written by a third-party for exposure to their brand. (I never suggested otherwise). He also added that they have never and never will send an unsolicited email. I did suggest that the emails could have been unsolicited, but other groups have promoted Viggle, those emails could have been solicited. He also said that they have never told their members that the stock was one of only a few left, I never implied that he had, simply saying that a stock has a low float suggests this. He also said that his reports were not recommendations to buy or sell securities, I never implied anything to the contrary.
Disclosure: I am short VGGL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.