Socket Mobile: Struggling Before And During Covid
Summary
- Socket has an interesting app first, asset light business model.
- Its scanners appear widely used by small and large businesses alike.
- Profitability has been sporadic and the company is struggling during COVID.
Company Overview
Socket Mobile (NASDAQ:SCKT) makes barcode scanners, contactless readers for credit cards, mobile phones, and other NFC devices, and the software development tools to support these devices.
Source: Company Website
The company positions its offering to small businesses and large corporations with giant warehouses. They partner with a variety of apps like Shopify and Square to attract small businesses but also attempt to have one of the most robust SDK's around so that large businesses with their own developers can customize and tailor the product line to their individual needs.
Source: Company Website
In the last few years, the company has shifted its focus to becoming primarily an app first based company. Their presentations present the strategy as one where they work with app developers and make their software the best it can be, which will then facilitate equipment purchases for those customers that need them because they are already in the ecosystem.
Source: Company Presentation
Pandemic Results
The company has been struggling in 2020. Revenue fell 18.5% to $15.7 million. Expenses and net income were both hit hard by a $4.4 million goodwill impairment charge. Absent that, the company would have actually been much more profitable than 2019.
Source: 2020 10-K
Prior to the pandemic, Socket had also been going the wrong direction with falling sales and higher expenses, resulting in few profits. I think the inconsistent revenue growth or lack thereof reflects the downsides to the company's business model.
The company only has 13 employees focused on sales and instead rely on their partners like Shopify to push their products. Focusing on software and development might be what the company feels it does best and it does give them an operating model that has low fixed costs and high operating leverage, but it also appears there are clear downsides as well.
Still, almost a 3rd of gross profit is spent on sales and marketing. While 2020 has had a number of one time items like a goodwill write off and an extinguishment of debt, 2019 was not all that great of a year either.
Source: 2020 10-K
Balance Sheet Commentary
Socket's balance sheet is decent, with very few long term liabilities and strong solvency ratios. There could be more of a cash hoard but with the pandemic struggles the company has been strained for cash and took a number of liquidity measures to handle the situation.
One important thing to note is that the company has a large $5.5 million deferred tax asset. This asset will only be useful if the company makes a profit in the future, which as we have shown might be unlikely. The balance sheet can also tell us that Socket has been unprofitable for many years, since they have a negative $52 million retained earnings balance.
Without getting too much into accounting, when a company reports a net loss, the books are balanced by decreasing retained earnings, reducing overall equity.
Source: 2020 10-K
It is interesting to note that Socket received various COVID-19 related financing including a $1m PPP loan and a $150k disaster relief loan through the SBA. In August 2020 it also borrowed $1.5m in a more conventional way but had to pay an astronomical 10% interest to get it. This shows Socket's disadvantage being a small company. They are not in the realm of a mega cap that can issue 50 year bonds at 1% interest.
Valuation
The worst part about the case for Socket is that the stock appears to have got caught up in the meme stock trade earlier this year and quickly jumped from $3 to $20. It has since drifted down to $8 over the past few months but is still up 600% year-to-date.
The market cap sits at $57m. Socket made $600k in operating income and $286k in net income in 2019. The stock may give the impression of a small cap technology company that is growing fast, utilizing an asset light business model, but that is not backed up by the reality and the numbers.
Conclusion
Sure, 2021 is bound to be a better year, but beside that, I do not see a catalyst or a reason to own Socket long term.
While they have some entrenched advantages that deter switching, I do not see them as able grab much more market share and their app focus limits their growth potential into tangential products and limits their ability to acquire competitors.
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