Yesterday was a fun day for me as my two largest holdings, Peak Positioning Technologies (OTCPK:PKKFF) (PKK.C) and Keek (KEEKF) (KEK.V) were up 18% and 59%, respectively, on their Canadian listings. KEK is up thanks to new enthusiasm over its impending transformation into Peeks, but PKK moving up is a bit of a mystery as the stock has been flat for a while and no news was out. I like to think that PKK's rise is a sympathy play to KEK as I have been touting both stocks to any investor within earshot of me. I expect the fun days to continue leading into November as both stocks have near-term catalysts that could see them explode.
My last blog post on Seeking Alpha titled "Keek Reborn: Peaking Into The Revenue Potential Of Peeks" compared the similarities between the two stocks. And believe me, that attempt at cross-promotion was very intentional. I think that anyone smart enough with sufficient tolerance for risk to be invested in KEK would also love to own PKK and anyone smart enough with sufficient tolerance for risk to be invested in PKK would also love to own KEK. KEK has doubled since I published that article and looks like it's just beginning a run. I think it's reasonable to expect PKK to follow suit.
With the rise in price and volume in KEK, there are a lot of new eyeballs on it. If I've learned one thing about the stock market it's to strike while the iron is hot and milk the attention for all that it's worth. So now is a perfect time to release an article updating my feelings on both stocks and continue my shameless cross-promotion. I'm making sure that every chaser, dreamer and trader on KEK is very well aware of the opportunity on PKK, forcing them to read all about it before they can get to the delicious update on KEK.
I've written about all I can write on PKK. If you're really that interested in reading up on this evolving investment thesis, I have written a total of 11 blogs about PKK on Seeking Alpha dating back to 2014. But the thesis on Peak as it currently stands is relatively simple:
$500 million in revenue and $25 million in EBITDA forecasted for 2017, less than a 2.0 EBITDA multiple
In my conversations about PKK, I have encountered some rather strange misunderstandings. People seem to think that PKK is entitled to only a portion of this forecast or that revenues will be just a small percentage of total transactions. No. Let's be clear. PKK is forecasting $500 million in revenue next year and is entitled to every penny of it. The portion owned by billionaire strategic investor Jiang Wang is already baked in as part of the 700 million fully diluted share count. The company compares itself to Alibaba so maybe that's why there is confusion of transactions not equaling revenue. Unlike Alibaba which just brings together buyers and sellers on its online mall and charges a fee which represents revenue, Peak takes possession of the goods for resale as part of the Banlan business that was transferred to the company. Therefore every dollar of goods that transacts on the company's Gold River platform counts as revenue. At 6.5 cents, PKK trades at a fully diluted market cap of $45 million. That means it is trading at less than a 2.0x EBITDA multiple.
Q3 financials are due by the end of November, but the consensus is that PKK will release financials well before then. Q3 is key because this will be the first quarter of operations. The company has already disclosed that it achieved $33 million in revenue between the August 12 inception date and September 30 but seeing those figures on paper as well as net margins should be a big boost to the stock and its credibility. I personally don't expect Q3 to have positive net income due to start up costs and low starting gross margin putting pressure on profitability. But the company will also be providing updated guidance which I think will be a significant positive catalyst as more business ramps onto the Gold River platform.
Peak management went over to China in September to meet with potential institutional investors and continued on a cross-country roadshow in Canada to do the same. CEO Johnson Joseph has expressed optimism to me that once numbers are out, these institutions will start following the stock and buying for clients.
So why hasn't PKK moved up? What's wrong?
Watching the price drift downwards in September after these investor meetings took place caught me completely off-guard. There are six reasons that I can identify that have been roadblocks to the rise in share price to a fair value. Some of them are legitimate while others are complete nonsense in my view.
1. Warrants. There are over 20 million warrants with a strike price at 5 cents expiring in November. Warrant holders may be selling shares in order to exercise their warrants.
2. China. People are still afraid of China thanks to what happened in 2010. I believe this is a misguided fear especially in the context that Alibaba trades at a 40 EBITDA multiple so there is clearly appetite for Chinese stocks out there. Peak management has years of experience in dealing with the country and PKK's CEO Johnson Joseph has expressed great confidence to me in Peak's billionaire investor and strategic partner Jiang Wang's ability to get things done within the country. The company has also hired Grant Thornton as an advisor to ensure that the books are done according to IFRS standards.
3. Low margin. In the near-term, PKK will be mostly a low-margin reseller business until the fintech revenues of the Gold River platform can ramp up. That has led to a forecast of a 2% EBITDA margin in 2016 and 5% in 2017. Some people don't like those low margins. I have to completely disagree with this logic. How many businesses show positive EBITDA margins in their first 17 months of operations? It took Amazon 7 years before it saw positive EBITDA margins. An EBITDA margin of 5% in 2017 should be celebrated, not scorned.
4. PKK's growth rate is overstated because it's from already existing business from Jiang Wang's companies. It's a transfer of revenue, not organic growth. I can see the merits of this argument. However, my rebuttal to this is that PKK is already trading at less than a 2.0x EBITDA multiple. What's a fair multiple for a reseller business that grows at, say, 10% a year? 5.0x? 6.0x? That still means PKK should be at least 20 cents. Plus PKK will grow as the purchase order financing business gains traction and in 2018 and beyond when the company can start to offer the financial settlement services through Gold River.
5. Management's one glaring weakness. I think PKK has a tremendous management team with honest people who have great knowledge of how to do business in China. However, I find them to have one glaring weakness. They are not strong presenters. When I was in Montreal for a conference in April, Johnson Joseph and Liang Qiu presented to a room of about 50 shareholders and high net worth individuals. It didn't go that well as people were confused and had too many questions afterwards. Perhaps it was nervousness over public speaking, or perhaps it's because not one person in the company is a native speaker of English to my knowledge (French or Chinese being their first language). Jiang Wang is probably the only Chinese billionaire who doesn't speak a word of English. This may be the biggest obstacle - an inability to clearly explain how great of an opportunity this is in a concise manner. A lot of big money players have the attention span of a gnat. You need to captivate them quickly. I think Peak should hire a VP of communications who can put that "wow" factor into their presentations. The silver lining to all this is that there's no way the guys at Peak could sell investors a bill of goods. They don't have the skill set nor the demeanor necessary to be pumper dumpers.
6. Bay Street is filled with drooling idiots in suits. Following up on my gnat comment, I'd like to share a story from the summer. During a shareholder meeting for one of my other investments, I met someone representing a retail broker. After the meeting was over, I told him about Peak Positioning Technologies and he was genuinely intrigued. He asked me the symbol and told him PKK. His response was something along the lines of "oh yeah, we recently sold that stock". How the hell do you sell a stock and you don't even know its name??? Or own in it the first place for that matter. I'd like to say that this encounter with a Bay Street "professional" was atypical, but unfortunately that hasn't been the case. This is my point. The majority of Bay Street isn't smart. Especially the ones that deal with small cap stocks. Bay Street doesn't want smart people. It wants people who can dress up in suits and kiss ass or schmooze big money clients while they let the trading algos do all the work flipping random stocks for pennies and transaction fee revenue from the TSX. We can't necessarily trust these people to make smart speculative investment decisions like PKK and KEK. And if there appears to be endless selling pressure we can't assume that there is a valid negative cause for it. The person selling might not even know the name of the company. Bay Street wants easy answers that generate high volume like "lulz Trudeau, time to blindly buy weed stocks with cutesy symbols like SPLIF and THC without any regards to the actual business prospects of any of them". P.S. I have no idea if those companies are any good or not. I just hate puns.
I don't think any of these issues are insurmountable ones on PKK and the stock price will eventually head to a fair value of at least 20 cents. Remember, it's currently trading at less than a 2.0x multiple on 2017 forecasted EBITDA so anything in the Q3 financials or conference call that solidifies that forecast should send it flying. Now that I'm done selling PKK to KEK shareholders and everyone else, it's time to get to selling KEK to PKK shareholders and everyone else, even after its recent doubling in price.
10pm Halloween night: Peeks goes live in a big way
Just like it was a painful four months waiting for Jiang Wang's money to come into PKK earlier this year, it was a painful wait for the Peeks app to go live (yet another similarity between the two companies). But good things come to those who are patient and Mark Itwaru was right to take the time he needed to ensure that Peeks worked well and could handle a potential massive spike in traffic. Now Halloween night promises to be huge as Peeks debuts its first major event with the Halloween House Party hosted by Mario Lopez. Following that (or maybe slightly before), Keek will transform into Peeks and any number of its 75 million users will now be using the Peeks app going forward.
There is one major risk factor. Should the app crash or otherwise be dysfunctional during this time even with the precautions taken by KEK management, the stock price would probably take a pounding in the short term until they fixed the issue. But other than that, I see only major positive catalysts in the days leading up to Halloween and beyond.
In the off-chance that Peeks gets such a poor response rate from Keek users that it acquires less than a million users, Peeks is already well on its way in its attempt to go viral even without Keek users. Two women named Sarah Stage and Emily Sears will be joining Lopez's party. I haven't heard of either of them, but apparently they are pretty popular as Sarah Stage has 2 million followers on Instagram and Emily Sears 3.5 million. They have an ability to attract the target market of young women who might want to make some money as content providers on Peeks and men who would love to spend money on content providers on Peeks.
Every investor in social media startups knows that raising cash is a big issue until profitability or a buyout offer. This immediate monetization model from day one reduces the chance that KEK will need to finance in the future as it has a revenue stream. The exercise of warrants and options at 30 cents, which seems like a distinct possibility now, will bring in over $5 million to the company. Finally, Peeks is supported by Riavera/Personas which is Mark Itwaru's holding company. Should the company ever be backed into a corner, the CEO has the option of raising capital through his own holding company. However at this stage, should the need to raise capital arise, I don't think that the company will have any trouble finding large investors at generous valuations for existing shareholders. KEK owes us the quarterly financials ended August by the end of October. So any day now we will get an update as to the current state of the balance sheet and how much revenue, if any, was achieved in the very early days of the app's demo release.
An interesting anecdote showing proof of concept on Peeks
I recently had a meeting with an employee of another company I invest in. He also happens to be an investor in KEK and had a very interesting story to tell me. One of his friend's girlfriend is on Peeks and made $600 in the first month of being on the app. I have absolutely no reason to think that this person is lying to me so I take this story at face value. $600 made by one person in the first few weeks of an app's existence while in demo mode is an incredible proof of concept, even if it is only one experience.
The revenue share owing to KEK on this one person for one month would be somewhere in the $50 to $100 range, depending on the source of revenue and whether that was gross or net to her. Now imagine multiplying that by 10 million users. Should this be a typical experience of Peeks content providers, by the time the app goes in full force someone like this user could easily pull in $2,000 or more a month for a few hours of streaming. I don't think Peeks will have any trouble recruiting millions of content providers under this circumstance. And that doesn't even take into consideration other initiatives like the offer box for marketplace solutions.
But keep in mind that this is one story shared between two shareholders. We have no idea of the source of revenue. For all we know, some KEK shareholder could have been her loyal fan errr....as an attempt to support the stock.
The great part about this app is that we should be hearing many stories like this so the investment thesis will unveil right in front of our eyes. It would be interesting to see if the content providers who make money on Peeks and know first-hand how good it is end up buying the stock as well.
P.S. I know that "content provider" really sounds like code for "web cam girl" but I have no evidence that this user did anything involving nudity based on the streams I could see. And even if she did, there is nothing wrong with that. If some people find that too offensive there are plenty of other streams for fitness, music, make-up and random party goers and that vertical will only get wider once the marketplace solution is launched.
The Personas and Keek licensing agreement has been settled - Keek gets 30% revenue share - worthy of a price target increase from $1 to $3?
One of the biggest risk factors I mentioned in my previous piece was that at the time the license agreement between Keek and Personas was still being hashed out. I estimated a $1 target on KEK thanks to that and other outstanding issues. Since then, Keek's licensing fee has been disclosed and it has been increased from an original proposal of 10% to 30%.
Ignoring all other recent positive events, logic would dictate that if I had a $1 price target on the stock when there was a 10% revenue share that increasing that share by three times to 30% would be justification for raising my target price to $3. A $3 target price would assume a fully diluted market capitalization of close to $200 million, which seems reasonably achievable based on where Peeks is headed.
However, just like I have an "official" target price of $0.20 on PKK with a $0.50 target ready to go once 20 cents is hit, I think it is fair to keep my target on KEK at $1 until that price is reached and then increase it to $3. At the looks of things, I might not have to wait to long to raise it to $3.
So yeah, if you're exclusively a KEK shareholder, take a look at PKK as an investment. If you're exclusively a PKK shareholder, take a look at KEK as an investment. And if you don't own either yet, the days leading into November is not a bad time to start looking into both as investments. It should be an interesting month for both stocks.
Disclosure: I am/we are long KEEKF, PKKFF.
Additional disclosure: I hold positions in securities as disclosed in this article. I have not received any compensation for this article and all opinions reflected herein are my own. The information provided herein is strictly for informational purposes only and should not be construed as a recommendation to buy or sell, or as a solicitation of an offer to buy or sell any securities. There is no guarantee that any estimate, forecast or forward looking statement presented herein will materialize and actual results may vary. Investors are encouraged to do their own research and due diligence before making any investment decision with respect to any securities discussed herein, including, but not limited to, the suitability of any transaction to their risk tolerance and investment objectives.