The Rehabilitation Of Remark Holdings

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About: Remark Holdings, Inc. (MARK)
by: John Gilliam
Summary

MARK shares could be worth 3-5x current trading price without China ops.

Value of Sharecare holding per MARK share = $3.25+.

Value of Vegas.com holding per MARK share = $2+.

MARK shares could be multi-bagger if management regains investor confidence.

Submit questions for author to ask in face to face meeting with MARK CEO and CFO Wednesday afternoon.

What questions must be answered for investors to believe in Remark Holdings management again?

Late last year I started publishing a series of articles about Remark Holdings (NASDAQ: MARK). I believed that Remark owned several assets that were severely undervalued given their operations and/or the relative valuations in their respective sectors. Over the several months that the articles were published, there seemed to be a fuller recognition of the value there and towards the end of that run, there began to be a very strong movement among investors seeking to gain exposure to Artificial Intelligence companies and/or operations. In my last article, I pointed out that Remark would arguably still be undervalued even in the low teens, an opinion that was based on the recent investment from CP Group at an implied valuation of $12 per share, management estimates for full year revenue growth indicating an expectation of exponential growth for the AI side of the business year over year, management comments that lead us to believe that the company might even outperform those eye-popping estimates and the implied valuations being accorded to other players in the AI space who were not growing as fast as Remark's Kankan was predicted to grow. At the time there were very few publicly traded vehicles to gain exposure to the AI space and for this reason (plus my article, of course) Remark stock soared to the teens as the demand for shares from Artificial Intelligence investors and speculators surged.

Chart MARK data by YCharts

Several weeks after my last article, a report was published by a writer who claimed that Remark Holdings was nothing more than a "tout" with no real business operations and essentially accused Remark management of misleading investors with regards to most every aspect of its business. While many of the claims in the report were verifiably untrue (for instance that there was "no real business behind Remark"), the report did point out several negative developments that were verifiably true (ex. the issues with the assets acquired in the Fanstang acquisition), noted a number of troubling questions about the Kankan division that were difficult to independently verify or refute and apparently did a very good job of creating fear, uncertainty and doubt about Remark Holdings generally among investors, as the release of the report caused an immediate and substantial sell off in Remark's shares.

Chart MARK data by YCharts

I spoke with management immediately following the release of the report and they indicated that the report was completely bogus / nothing more than an attack by short sellers. But in the months that followed the release of that report, CFO Doug Osrow left the company and this was followed by successive quarters of missed earnings and revenue targets and as one might expect, a continuation in the falling stock price trend. In the most recent (Q3) earnings release, the company reported a stunning earnings/revenue miss mostly related to the Kankan operations and also announced a missed debt payment that put the company in default. Management also indicated that the roll out of the Kankan service would be slower than they had previously indicated.

In the weeks following the Q3 report, the stock traded down to multiyear lows and over the last week has been trading in the $1.20-$1.30 range, which equates to a market cap in the $45-$48m range.

Chart MARK data by YCharts

While the issues above certainly allow for doubt as to the company's prospects and there remain many aspects of the Remark Holdings story (in particularly the Kankan and other Chinese operations) that are enormously difficult to independently verify, we believe that there remains very significant value within the other assets and operations of the company that are now easier to value than when we originally published the articles about those assets.

In our last article, we stated "we believe the next liquidity event for Sharecare will give evidence that the company is now valued north of $2 Billion". When Sharecare acquired the Window Channel Network six months later (July 2018), the company raised $20m at a pre-money valuation of $2.6B. In an interview that same month, Sharecare CEO Jeff Arnold indicated that he expected the company to go public within the next two years and suggested that the valuation could be in the $4 billion range. Thus, unlike our previous attempts to speculate about a proper valuation for Sharecare, we now have some hard numbers that can be used to determine a valuation range for Remark's 4.5% Sharecare stake. The $2.6 Billion valuation in the Wells Fargo Strategic Capital investment equates to a value per Remark share of over $3.25 per share and the IPO valuation mentioned by Sharecare CEO Jeff Arnold would be approximately $5.29 per Remark share.

Regarding the company's other assets including the operating businesses built around the Vegas.com and Bikini.com domains, we believe there is tremendous value still remaining, value that we expect to be monetized soon given management's comments on the Q3 conference call. In the year since we wrote about the Vegas.com business, there has been growth in the most significant metrics including revenue, gross bookings and conversions. Despite these gains, we believe the valuation methodology we used for these other assets should include a higher discount than we used previously, to reflect a more aggressive sales process. With the larger discount Vegas.com would still be valued in the $65 - $90m range which would equate to $2 - $3 per Remark share.

MARK Sum of the Parts Analysis
Segment Value Per Remark Share Low High
KanKan AI ? ?
Sharecare 4.5% $3.25 $5
Vegas.com $2 $3
Total Value Per Remark Share Range $5.25 $8

It is understandable that investors might currently be skeptical of Remark given all of the issues mentioned above. However, we believe management can start to win back the confidence of investors by clearly communicating their plans and expectations for the next 12 months and by answering the questions we will gather through this forum. These questions will be presented to management this week in a face to face meeting between the author, Remark CEO Shing Tao and CFO Allison Davidson. We will be compiling a list of the best questions submitted through this forum and I will share the responses here. We hope that this article can help to remind investors of the value of Remark's Sharecare stake and US-based operating assets, create a better understanding of where the company is with its Kankan division to allow for investors to properly evaluate its prospects and just generally open up the lines of communication between shareholders and management to begin the process of the Rehabilitation of Remark Holdings.

Disclosure: I am/we are long MARK. 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.

Additional disclosure: My intent in publishing this article is to inform investors about developments related to Remark Holdings. I did not and do not intend to suggest any specific action by any investor or shareholder and strongly suggest that any decision made to buy or sell shares of this stock be made after consultation with an investment advisor as to the suitability of such an investment. I currently own shares of MARK outright and in some managed accounts. I may buy or sell shares at any time based on market conditions and the trading price of MARK.