MobileIron: An Oversold Stock Needs Money

Nov. 11, 2019 9:51 AM ETMobileIron, Inc. (MOBL)BB, VMW, BB:CA10 Comments
Kayode Omotosho profile picture
Kayode Omotosho
6.03K Followers

Summary

  • MobileIron didn't deliver on the Zero-Trust narrative.
  • Macro and competitive softness overshadowed the product expansion narrative.
  • Optimism won't renew in the near term.
  • MobileIron is a HOLD with a price target of $5.
  • As it stands, a merger or acquisition is the best way for investors to unlock value.

Source: knowyourmeme

After MobileIron's (NASDAQ:MOBL) recent sell-off, investors have called my attention to the error in the last thesis I posted. Kudos to BlackBerry (BB) bulls for calling out the fault in the narrative, there is a lot to learn from their investing style.

Firstly, I want to clarify that no one can get it right all the time. And with more information, we all acquire a revision of reality. My thesis was that MobileIron needs to enjoy some margin expansion, which is the easiest way to raise money to fund its new initiatives. Since MobileIron's strategy is clear and well outlined, I saw no reason for management not to execute on its set goals. This thesis didn't play out, and the stock plunged.

With that being said, let's do some analysis, shall we?

Demand/Market Overview (Rating: Bearish)

Starting with an overview of our third-quarter results. Revenue in the third quarter was $52.2 million, up 6% year-over-year and slightly below the midpoint of guidance. ARR growth came in at 14%, which was short of our expectations. - Conference Call Transcript

Source: Author (Using Data from Seeking Alpha)

MobileIron's tepid historical growth, coupled with the result from the last quarter, suggests the problem with the growth narrative is from the demand side of its offerings. As you will see in its income statement, which we will analyze in the financials section of this article, MobileIron is spending a dollar to make less than a dollar. This is not a problem of management not going all in to drive sales; customers aren't simply buying MobileIron's products as fast as anticipated. Maintenance ARR was nearly flat (+1% y/y), leaving subscription ARR (+23% y/y) as the only driver of product growth.

Cross-sell of threat defense hasn't driven more than a high-single-digit of the EMM install base.

After putting a lot of faith in the Zero-Trust thesis described by management last quarter, I am gutted that MobileIron isn't able to deliver on its niche strategy in the EMM space. This doesn't bode well for the future of MobileIron.

Business/Financials (Rating: Neutral)

MobileIron's selloff was chalked up to softness in Europe. Europe aside, MobileIron's product seems to be struggling in the market. It seems the VMware/Carbon (VMW) and the BlackBerry/Cylance mergers are too much a formidable force for MobileIron to handle.

Source: Author (Using Data from Seeking Alpha)

MobileIron's margins are already stretched thin. With softness in Europe, it's safe to say that we wouldn't be getting significant improvement in profit margins in the near term.

Source: Author (Using Data from Seeking Alpha)

Changes in working capital drive cash flow from operations. Earnings haven't improved enough to contribute to cash flow. Going forward, I expect the story to remain the same in the near term.

Source: Author (Using Data from Seeking Alpha)

Investments in marketable securities drive cash flow from financing activities. This means either management hasn't found good acquisition targets or demand isn't strong enough for management to use the cash to drive sales as MobileIron is in a fast-growth market.

Source: Author (Using Data from Seeking Alpha)

Cash flow from financing activities has been driven by share repurchase. It appears management is convinced the stock is undervalued. However, management isn't clear on the best bet to organically accelerate shareholder returns. When you have a combination of share repurchase, investment in marketable securities, and tepid organic growth, the best way to unlock value is through a merger or acquisition.

Lastly, MobileIron continues to enjoy a clean balance sheet with zero debt. Overall, MobileIron's financials aren't the most attractive from a growth and profitability standpoint.

Investors/Valuation (Rating: Neutral)

The recent sell-off summarizes what investors think of the future of the company: they aren't optimistic. Analysts have an average price target of $7.3, which echoes the bullishness in my previous thesis. Growth guidance remains tepid at 7% in 2019, and 6.5% in 2020. MobileIron has a forward P/S ratio of 2.65x, which is a 1.31% discount to its sector median. This is driven by its tepid forward revenue growth guidance. While I consider this valuation attractive, I don't see it getting assisted by earnings growth or multiples expansion in the near term. As a result, I will temper my bullishness.

Macro/Competitors (Rating: Bearish)

While our U.S. business continues to make steady improvements in execution and delivered its highest rate of revenue growth in 7 quarters, our business in Europe, particularly the UK and Germany, slowed. This has resulted in revised ARR guidance for the year, which Scott will cover. - Last Conference Call

As highlighted in the business section, MobileIron is facing both competitive and macro headwinds. The company is struggling to find its footing in the EMM space. The expansion into adjacencies like threat intelligence isn't taking off as expected.

Going forward, these competitive struggles will persist, given MobileIron's small size. As a result, I'm not bullish on MobileIron's competitive positioning.

Conclusion (Overall Rating: HOLD, PT:$5)

My previous thesis fell flat on its face as I overestimated management's ability to deliver on its new initiatives. Maybe it's too early to judge. However, with the current competitive stack and investor's reaction to the last earnings, MobileIron will go back to the hidden part of the valuation cave where optimistic investors seldom visit.

The case that it will enjoy multiples expansion has weakened significantly. As a result, I'll be revising my position to a HOLD rating with the hopes that MobileIron will find an acquirer.

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This article was written by

Kayode Omotosho profile picture
6.03K Followers
Kayode's strategy aligns only with businesses that have competitive moats, solid financials, good management, and minimal exposure to macro headwinds.-------------------------------------Coverage tilted towards tech stocks (IoT, Cybersecurity, Cloud, DevOps, Data management)

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.

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