I have always been a fan of companies that are breaking into new industries or exploring new technologies, but the truth is that they simply do not make for easy investments to follow. More often than not, these companies must struggle through the valley of financial death in which they must first prove and establish their ability to scale their operations before they become profitable enterprises.
In many instances, they will incur increasing losses and friction from the incumbent industry. As such, being able to convince investors of their long-term viability becomes a task that is much too difficult to endure.
It is for this reason that I remain impressed when a company with a bold plan, competitive advantage, or innovative idea can gain the access to capital and backing that it needs in order to take it to the next level. It is for this reason that I want to take a brief look at IDI, Inc. (IDI). The data analytics company is in the process of evolving into a key leader for the nascent data fusion industry.
Let me first preface that those who want to know more about the story should consider reading the articles by Global Value Research Company linked here. This Seeking Alpha contributor has done a terrific job in piecing together much of the history that has led us up to the current day.
IDI, Inc. is a data analytics company that provides information and marketing solutions to the risk management industry. Through its recent acquisition of Fluent, the company took a giant leap into the consumer marketing industry. Through numerous synergies, the company is able to use its vast data acquisition and analytics capabilities in order to significantly improve marketing insight.
The company does so by establishing key connections and links found in the data that would not otherwise be apparent on their own. More importantly, the company is able to leverage the use of its data in order to generate multiple sales on a one-time purchase. It does so as it is able to cross reference its databases in multiple different ways for multiple different clients at any given point in time.
While normally a new information technology company would undergo a lengthy period of time in scaling its operations, one of the unique advantages of IDI lies in some of its key backers. In particular, we must take a look at Dr. Phillip Frost, the current CEO of OPKO Health (OPK). As a billionaire investor who has built his fortune on making savvy acquisitions and mergers, Frost has proven his ability to marry companies together that can provide optimal synergies and stability.
For example, in his current company, Frost managed to unite together OPKO and Bio-Reference Laboratories Inc. in an all-stock acquisition. The result ultimately formed a profitable company with synergistic advantages that was purchased via an inflated stock propped up by Frost himself. After all, the billionaire has been purchasing large amounts of his own company's stock on a near daily basis for a little less than a decade.
Yet when we take a look at IDI, we can see that his interest has definitely been growing in this company. Just a quick look at his purchases since the start of this year and we will see that he has already acquired another 50,000 shares in common stock over several transactions. While this may seem small, it also brings us to the point in that they were not significant in relation to what he has already done for the company. Like saying, "follow me," Frost is merely showing to the investment community that there is something to watch here.
In December 2015, Dr. Frost joined IDI's Board of Directors to serve as Vice Chairman after investing an impressive $40 million in preferred stock in order to help unite IDI with Fluent, Inc. This investment was multiples of what IDI had ever even generated in terms of revenue over the course of its existence. As such, Frost now remains the largest shareholder in the company. It was also not his first time he had an interest in buying into the underlying company. Dr. Frost had previously attempted to acquire the precursor to IDI back in 2013 via the Data Acquisitions Group, LLC according to the article found here.
What makes the Fluent acquisition so important apart from its synergies with IDI's data fusion capabilities is the fact that it will significantly raise the profile of IDI. Indeed, the fact that IDI only had a mere $20 million in total assets in Q3 2015 goes a long way in showing that this was essentially a reverse merger in which Fluent was brought public. As of Q4 2015, after the acquisition of Fluent, IDI now supported total assets of $289 million. Yet despite the more established business found in Fluent, it remains clear that IDI's data fusion business remains the key focus going forward.
In March, IDI announced its year-end earnings in which it reported total revenue for the year of $14.1 million. Revenue from Q4 2015 was $10.8 million, and this included the $10.1 million in revenue generated by Fluent from the period of December 9 to December 31. While the company did report a significant loss of $32.6 million in Q4 2015, this was largely due to a one-time expense of $39.7 million.
In the earnings report, Vice Chairman Frost provided impressive guidance for 2016, in which he asserted that the company anticipates generating "north of $170 million in revenue with continued strong earnings." This remains impressive considering that IDI generated total revenue of $0.82 million in 2014 and $14.09 million in all of 2015 (of which was largely due to Fluent in December).
It is important to point out that Fluent as a private company has already managed to become a profitable enterprise. According to the Regulation G Disclosure shown above that was submitted to the SEC, the company has generated positive net income over the past four years. Additionally shown through the graphic below, the company has maintained revenue growth of an impressive 179% over the last four years along with a compound annual growth rate of 29% per year.
In 2016, IDI released a BETA version of its data analytics platform, idiCORE. In anticipation of this platform's release, the company experienced 2,000% growth in new customer acquisitions. It is widely anticipated that idiCORE will elevate the company to the next level. It is also likely to continue Fluent's strong revenue growth going forward. The platform's release is anticipated over the coming year.
IDI currently trades with a market capitalization of $258 million based on the closing share price of $5.61 as of April 15, 2016. Based on the anticipated revenue of $170 million in 2016, this would represent a mere forward price-to-sales ratio of 1.52. This metric alone appears to suggest that IDI remains far undervalued in light of Fluent's historic revenue growth as a digital consumer marketing company. Yet it also severely depreciates its future growth after factoring in IDI's new platform and the synergies that will result with Fluent.
IDI has entered into one of the fastest growing industries via a back door opened by its key investors. In particular, Dr. Phillip Frost has vouched for the company and heavily invested into its development. Fluent's growth is only going to be accelerated through its new marriage with IDI's data analytics platform. As such, investors should consider keeping an eye on this under-the-radar stock as it continues to develop over the coming year. While its lack of history may scare some people, there remains a solid business here that is now propping up a new data fusion platform capable of accelerated growth.
Disclosure: I am/we are long IDI, OPK.
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.