- Net-net stock trading at 20% discount to Net cash per share.
- Just achieved positive Net Income in the last quarter. Cost-efficient and aligned management. High insider ownership ~15%.
- Market Cap is too small to be efficiently priced by market.
- High volatility and low volume offers good buying opportunity.
Like many of the tech stocks that IPO-ed and survived the dot-com bubble, Support.com has traded at a mere shadow of its former self. However, this small ~48M market cap stock has been gaining significant traction recently (a 30% appreciation), and this article aims to understand why.
I believe most of the market has overlooked this rare “net-net” stock due to its small size, and that the stock offers a decent return with almost no downside.
In June 2016, VIEX Capital Advisors, a group of activist investors, fought for control over SPRT. What caught their attention was the negative enterprise value of Support.com. At the time of their involvement, SPRT had a market cap of 43.4M vs a net cash balance of 61M. The activists saw the incumbent management as incompetent and misaligned with the interests of their shareholders, reflected in the low insider ownership, high compensation plans and poor capital allocation. Ultimately, VIEX won and they removed the entire management of Support.com. You can see their activism investor presentation here.
Recent Developments – Net Income Positive
Since taking over the company, VIEX has replaced the management by bringing in Richard Bloom as CEO and President. The activists focused on shutting down funding for the Nexus/Cloud strategy that was implemented by the previous management. They saw the segment as taking too much R&D funding without the possibility of generating significant profits when launched. The termination of funding for the Cloud offering greatly helped operating margins as R&D spending decreased by nearly 50%. (Source: Q3 17 10-Q).
Another step taken by the new management to cut costs were to drive reductions in SG&A. As outlined in their Q1 17 Press Release, “cost cutting initiatives included changing certain vendors to the company for various products and services, more efficiently running our call center operations, and selective headcount reductions, among others”. The effectiveness of these efforts are also telling: The total SG&A of the company decreased from 15,587,000 to 8,858,000 in the same 9 months from 2016 to 2017 – a 43.2% decrease.
These initiatives were all achieved with revenue staying relatively constant: $43,055,000 to $39,744,000 over the same 9 months. This is due to the nature of Support.com’s business. It has numerous recurring contracts with large business such as Comcast and Office Depot, who themselves have a steady base of customers. For cost efficiencies (establishing their own in-house call centers) and service quality reasons, it is also unlikely that either company would terminate its business with Support.com. Comcast, for example, had originally outsourced its call center business overseas, but after facing a large consumer backlash over service quality, they were forced to eventually move it back home to the U.S.
Lastly, the most notable recent development is found in SPRT’s Q3 17 results. For the first time since 2012, SPRT reported a quarterly positive operating profit. While overall cash flows have yet to turn positive, this is reflective of a strong start. This is because the cost cutting measures are relatively permanent and not one-time reductions. Combined with a steady revenue, the business looks set to regain a full year of positive cash flow starting 2018.
It's all about the Cash
Why is positive cash flow important? Simple, as we outlined earlier, SPRT is a stock with a negative enterprise value. It belongs to an extremely small group of stocks described by Benjamin Graham as “net-nets” – stocks who’s net current asset values are greater than their market capitalization. Prior to being net income/cash positive, the stock understandably traded at a discount because of the possibility that the excess cash is drained away as the business continues to operate. However, that should no longer the case should SPRT successfully cash flow positive for 2018. Currently, SPRT trades at $2.60 a share, an approximate 15% discount to its net cash per share of $2.90. This is 15% upside is before assigning any value to the existing contracts or technology the business holds, as well as the Net Operating Losses (essentially future tax savings) that are on its balance sheet. I will not be discussing NOLs in this article, but you can refer to a fellow contributor’s article for a detailed analysis which relevance has not changed.
Recent trading activity
Source: Yahoo Finance
As a small 48M market cap stock, the market took awhile to respond to it’s recent Q3 results. However, once they caught on, you can see a sharp appreciation in share price from a low of $2.27 to $2.90. Today’s price of $2.60 is a result of the stock’s low trading volume. A small number of transactions leads to a higher volatility. I say this because there has been no relevant news from the company since its last earnings release. Notable funds buying a stake of ~ 5% in recent months can be found below. In fact, there has been such strong buying activity that SPRT had to release a press statement warning investors about not buying more than a 5% ownership in the company for fear of triggering a loss of SPRT’s NOLs.
With the volatility in share prices, I see anywhere below $2.60 as a good price to buy in. At that price, there is at least a 20% upside to the net cash per share of $2.90. The biggest possible risk for the company would be a loss in a major, which at this price, offers no downside – the business could completely stop operating and you would still make a profit (theoretically). Net-net stocks are truly hard to find in today’s market, and one with strong catalyst is almost impossible. As small investors, it is in the ability to buy stocks like these that we have an edge over the large banks and funds.
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
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Analyst’s Disclosure: I am/we are long SPRT. 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.
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