MeetMe Is Making The Right Moves, But So Should You

| About: The Meet (MEET)
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MeetMe announced its plans to acquire Skout.

MEET is richly priced, according to financial metrics.

It may be overpaying for Skout.

Elevator Pitch

MeetMe, Inc. (NASDAQ:MEET) is a publicly traded company that claims a core competency of social discovery. The company's namesake platform, MeetMe, allows users to connect with one another, share messages, post pictures, and otherwise interact with and discover other locals.

2015 was a milestone year for the company and its shareholders, as MEET brought it in its first annual profit. MEET is managing to grow at a time when Twitter (NYSE:TWTR) and Facebook (NASDAQ:FB) are experiencing declines in user engagement and slowing growth in user bases. MEET recently announced its intention to acquire Skout, another social discovery company. Skout is a good acquisition for many reasons, and while the growth in combined earnings and other metrics lean toward impressive, MEET's valuation, both before and after the acquisition, is inflated.

Thesis and Catalyst For MeetMe, Inc.

To be balanced, Skout's favorability as an acquisition target comes from a no more than 5% overlap with MEET's core users. On top of this, MEET can diversify by acquiring a solid Asian-Pacific user base. This regions hosts impressive numbers, including the largest growing numbers of people who use social media. Skout is also profitable and will add incremental earnings to MEET.

MEET has touted its growth and turn towards profitability; however, its numbers are not that impressive. Its current price-to-earnings ratio is 43.47. MEET's monthly active user total for May of 5 million is trumped by Twitter, LinkedIn, Pinterest, Instagram, and many others — all applications that attract similar audiences and fight for the same user resources.

Engagement on Facebook is actually down slightly, despite user numbers being moderately up. Other social discovery names, like Tinder, are seeing double-digit growth, compared to MEET's single-digit growth, and standout with their unique features and simplicity with its left or right swipe interaction. In my opinion, MEET's user interface is much more complex, and is tab-driven, making the experience less fun and engaging.

MEET, in this case, is overpaying considerably, and investors are overpaying considerably once you look at the valuation metrics. CEO Geoff Cook said in a press release that the combination "provides a pathway to $100 million in revenue in 2018 with adjusted EBITDA margins approaching 45 percent."

Using today's market prices, investors now are paying 2.38 times sales expected two years from now. The press release also had 2016 figures with annual revenues expected to be in the $70.5 million to $73.5 million range. That still provides a price-to-sales of over 3. Skout's 2015 revenue of $23.8 million pales in comparison to the $54.6 million price-tag MEET is paying with cash and shares. With regards to the added EBITDA of $7.5 million for Skout in 2016, MEET is paying 7 time that. MEET is buying when share prices are high too and the Skout valuation is based on June 24's closing price. Should shares fall below that price, the potential dilution could be mitigated and the value not as exorbitant.

The explanation for such a high-multiple has been potential synergies surrounding the two and the related expertise MEET can bring Skout. Skout has done well on its own, going from the brink of bankruptcy years ago to profitability. This also hints at the possibility of MEET's success being industry-driven and not company-specific. Skout's own expertise in my opinion is not much less or is in many ways equal to MEET's, as the entrepreneurial founders have started other apps including, but not limited to, Fuse and have acquired nightlife app Nixter. Disregarding the technical expertise perspective, there are few realizable synergies. The companies will remain divided and Skout will remain in San Francisco. The companies use similar monetization and there may or may not be synergies there.


In short, if you plan on buying MEET, it would be best to wait. MEET is valued at relatively high multiples of sales, cash flows, and earnings, even given the acquisition of Skout. It would be best to wait if you wish to initiate a position and given the mobile sector shift away from social media apps into messaging apps, I would consider a short position at or above current levels. The stock price should retouch the $3 to $4 range as RSI comes down and the market cap realigns with fundamentals.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.