Newsletter marketers love to be able to tout a buyout and promise a double in the stock they’re recommending — they know it almost can’t help but catch your attention… and heck, if the stock’s small enough they might even be able to cause it to double just by pouring a few hundred enthused new investors into the shares.
So it’s no real surprise that Jason Stutman is pitching his The Cutting Edge newsletter with a big, bold “Buyout Imminent” headline.
Here’s the top of the ad, which sure drew in Gumshoe readers and sent a flurry of questions my way:
“Giant Silicon Valley Corporations Are Looking to Gobble Up This Small $3 Firm:
“If This Tiny Stock Doesn’t Deliver 100% Gains or Better…
“I’ll Send You a $1,000 Check!
“You Never Have to Give it Back.
“You Can Spend It However You Please…”
I haven’t heard much about Jason Stutman, and this pricey The Cutting Edge trading service appears to be fairly new as far as I can tell — it looks from the marketing materials like they’re trying to recommend stocks with big future potential, probably mostly in technology, that have been oversold. The only pitch of Stutman’s that I’ve covered recently was when he was teasing Opko Health as the “Doctor on a Chip” stock for a less expensive newsletter at Angel Publishing (we covered that in more detail in this Friday File from last month, which I’ve now opened up to all readers if you’re curious)… so he doesn’t have much of a track record yet when it comes to teasers here in Gumshoedom… but let’s see who he’s teasing now, shall we?
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“Penny Stock Lands Major Deal With Silicon Valley Titan
“Microsoft must really like what it sees…
“After all, the firm doesn’t sign deals with just any tech company.
“Microsoft has partnered up with this tiny firm for its earth-shattering technology.
“The deal gives this penny stock access to Microsoft’s giant, growing resources. I’ll explain why this is so valuable in just a moment…
“But a deal like this is absolutely huge for this penny stock, which I believe could be worth several billion dollars in as little as a few years from now.
“I think investors who act now could make 100%… and that’s just for starters.
“Beyond that, the gains could be… well, extraordinary.”
What is it that this company does? He says they have an “incredibly disruptive technology” and have “cracked Silicon Valley’s master code” — which basically means that they can help different kinds of computers all run the same software, even if it wasn’t intended for a particular device. Here’s more…
“Employees are now increasingly mobile, traveling and working in offices all over the world.
“On top of that, the employees of a company are not all using the same devices for work.
“The amount of different devices used these days, even in one office, is STAGGERING.
“There are laptops, desktops, smartphones, tablets, Apple TV, and more.
“In short, not everyone is sitting in the same office or using the same devices anymore.
“With employees using different devices and working from many different places, it’s becoming difficult for employees to view and share the same files.
“That’s because not all of the software they’re using is compatible on every device….
“But here’s where our little $3 firm — and its revolutionary technology — comes in…
“Its technology lets employees access and share virtually ANY program — on ANY device — from anywhere in the world.
“In other words, it makes virtually any piece of software compatible on almost ANY modern device.”
And, of course, there’s that “I’ll give you $1,000” promise…
“Silicon Valley has no choice but to embrace this company’s technology.
“Big tech juggernauts like Microsoft and Dell already are.
“Now, the science behind it is super technical. No matter how computer savvy you are, it’d be difficult to understand it.
“But I’m so on board with this technology — and its massive potential — that I GUARANTEE this stock shoots up 100% or gets bought out.
“And if it doesn’t, I’m willing to give you $1,000, which is yours to spend as you like.”
So who is it? Thinkolator sez that we’re being teased about Sphere 3D (ANY), a company that sells cloud storage and virtualization technology.
This is indeed a very small company, and a young one (it went public in 2013, and still has a market cap around $200 million, and most of the revenue-producing parts of the business have been brought in by recent acquisitions), and it has been on a pretty wild ride lately — it’s up quite a bit from the $3 lows of a couple months ago, so it’s more of a $5 stock than a $3 one these days, but it is also well below the $11ish highs it hit almost exactly a year ago. Some of that surge might be coming from Stutman’s ad push in recent days, though it’s a small stock in a hot sector with quite a bit of news flow so it doesn’t take a lot of new attention to make it bouncy.
And the $1,000 offer from Jason Stutman is, of course, just another variation on the “you like it or (part of) your money back” spiel — he’s selling two-year subscriptions for $1,795, and he’ll send back $1,000 of that if you don’t have a chance to double the share price in two years. A lovely sentiment, I suppose, but it’s just a partial refund — not a gift of $1,000. If you sign up for a membership in the Stock Gumshoe Irregulars for $1,049, I’ll send you $1,000 too.
The shares have been volatile enough, and the company is small enough, that it’s certainly conceivable that it will double over the next two years, particularly if you are also willing to see it drop 50% at some point during that time period. Heck, if Stutman really recommended it at $3 a few months ago he’s pretty close to a 100% gain already.
He’s not the only optimist on this one — here’s a recent analyst excerpt from Roth Capital from a couple weeks ago, predicting a bounce of 50% or so…
“Our target price of $8 is based on 10 times target price/earnings multiple on calendar 2020 GAAP EPS estimate of $1.04 (with revenue of $255.5 million and adjusted Ebitda of $72.3 million) discounted back at 10% per year. Our $8 target price is supported by a discounted-cash-flow analysis using a weighted average cost of capital (WACC) of 8%. We caution investors that Sphere 3D has to execute well with its design wins for its Glassware 2.0 and SnapCLOUD storage/data-management technology and also successfully execute on the partnership with Microsoft Azure Cloud services and other key partner programs.”
That’s a strained argument that only a sell-side model-obsessed analyst could love, but it seems to reflect the sentiment pretty well. You can certainly make the argument that you think Sphere 3D’s technology is about to take a big leap and bring in new customers, and that their growth could accelerate… but basing your “target” price on 2020 earnings is, of course, beyond silly.
There’s also some thinly veiled hinting by Stutman that it will be Google who buys out Sphere…
“Google’s top executive for its Education Division, Jason Katcher, has commented about this tiny company on his Twitter account multiple times.
“He’s even hinted at a potential buyout…
‘[This firm] would make for an interesting acquisition,’ says Katcher.
He’s personally accumulating shares of this tiny $3 stock too, which is another reason I think Google could already be negotiating a deal with this company.
‘Buying more. Too much upside,’ Katcher says.
“Talk about a ringing endorsement.
“Of course, he’s not the only one who’s loading up on shares.
“Remember, Wall Street banks have recently increased their positions in this stock by 239% in just three months.
“That’s more than any other small-cap tech company on the market.
“Cyrus Capital has a large stake in this firm with over 5.9 million shares. It is a major investor in Virgin America, the airline founded by billionaire Richard Branson.”
Katcher tweets sometimes about his individual investment ideas and did indeed tweet about $ANY a few times — though the speculation about a takeover called out VMWare (VMW) and Citrix Systems (CTXS) (both virtualization pioneers) as possible acquirers.
Sphere’s technology is not alone in the virtualization space, of course — their Glassware 2.0 technology seems to be a “container” technology that is in some ways similar to Docker, an open source and hotly-discussed container technology standard that’s being commercialized now, and there are lots of startups in the “container” space. There’s a decent explanation of what Docker does here, an explanation from Sphere 3D of its Glassware container product here, and a piece about a dozen other “container” startups here if you’re curious about getting more background.
Sphere 3D has been working closely with Microsoft and its Azure cloud platform, and hosting events at Microsoft tech centers to spread the word — and they did make a deal with Microsoft that lets Sphere bundle Microsoft’s server software with its Glassware virtualization appliance. I don’t know if that’s unique or fantastic, but it’s certainly not bad. They’ve also made some deals in the education space, where virtualization and cross-platform compatibility is a pretty big deal (with schools often using outdated, specialized or inexpensive equipment, like iPads or Google Chromebooks, but having to run specialized educational software designed for different operating systems), but the financial impact has so far been pretty light and it’s still quite early in their rollout — they had essentially no revenue a year ago, and have boosted the top line to about $20 million as of the last quarter thanks largely to a series of acquisitions.
And funds managed by Cyrus Capital do hold a large position in Sphere 3D, though that’s largely because they had a large stake in Overland Storage before they were acquired by Sphere late last year — Cyrus also holds some of Sphere’s convertible debt and warrants, so their position really tallies up to about 22.5% of the company. I haven’t seen any commentary from them about their plans for this holding. Cyrus does indeed also hold a large position in Virgin America, it looks like they held that before the IPO last Fall as well but now do control about 24% of the equity in Virgin America. Doesn’t mean much when it comes to Sphere 3D shares, of course, but I guess the point is that they’re not an inconsequential investor.
Will Sphere 3D get taken over? Are there huge gains in their future?
I have no idea — they were running a bit low on cash recently and did a private placement for about $4 million and also extended some of their credit lines a little bit to add what looks like about $5 million more in borrowing potential, but that’s only a quarter or two of “cash burn” at the current pace so they’re still pretty close to the edge financially. They need more capital if they’re going to continue pushing to roll out their products aggressively and get sales up — that capital will be a lot easier to get now, with a product that seems to be getting some good attention and with real revenues rolling in, but I’d be surprised if they didn’t sell some more stock sometime soon unless revenue starts growing much, much more dramatically.
We have a tendency to think of small young tech companies as being cash-rich, but that’s certainly not the case with Sphere 3D — indeed, one of the only things that makes me specifically nervous about Sphere 3D is that they’re not gushing with cash, there are plenty of pre-revenue companies with cloud products that can seemingly raise $100 million dollars or get billion-dollar valuations without even having to say “please” these days, so why isn’t Sphere “hot” and overfunded? Did they just fall through the cracks because they went public in Canada initially, or because they just remade the company through acquisition recently? I don’t know, but it gives me pause and reason to think more about it before getting excited.
Sound like the kind of speculative little tech company you’d like to own? Let us know what you think with a comment below.
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