Yeah, probably not. But that’s the promise — and there is some mathematical possibility that it could happen, if all the ducks line up in a row and this company becomes dominant. You never know, I suppose, but let’s go into this with somewhat more realistic possibilities… like, “this company could double.” That I could maybe buy — it is, after all, a microcap stock that has some revenue and is a longstanding business, and crazier things have happened.
How’s that for a teaser of an intro? The ad we’re looking at today, which implies that this $50 million company will become a global giant on par with Apple, Facebook and Google (all three of which I own, for disclosure’s sake), is from Alex Koyfman for his Penny Stock Millionaire newsletter — he’d like you to cough up $500 to subscribe, and after that he’ll tell you what company this is…
… but since you’re here at Stock Gumshoe, you probably know that’s now how we do things. We take the clues and hints that ads like this drop, figure out what they’re actually talking about, and discuss it in the light of day… often, we find that once you remove the allure of “secret,” it’s a lot easier to see the full picture about a company (thanks to the quirks of human psychology, you’re probably less likely to think about a stock critically if you’ve just paid to learn about it — your brain still wants to remind you that subscribing to that newsletter was a brilliant choice, therefore the stock that enticed you must be brilliant as well… kind of like when you peruse the car ads after you’ve already bought your new car, just to remind yourself that you’re brilliant).
Sometimes that means the company ends up appealing to you (or me), sometimes not. But at least we can learn about a new idea, perhaps, and think about it as rationally as we’re able. So… let’s begin.
The ad promises the moon, of course, here’s a bit more comparing this “secret” company to Apple, Google and Facebook…
“All told, these three companies command a combined market capitalization of more than $1.3 trillion….
“And yet all three of these companies put together still do not equal the number of users about to be scooped up by a company you’ve probably never even heard of…
“A company still so early in its development that today’s shareholders will likely see between 14 and 20 times their money back within the next 12 to 18 months and perhaps 10 times that much in the next three to five years.
“It’s a disruptive young company that’s already working to make the business models of the Big Three as obsolete as the oil monopolies of the early 20th century.
“Few know the company’s name. You’ve probably never seen its product. But in just a couple of years, this company — which right now is valued at less than 1/10,000 the market cap of Apple — could be sitting on the single-biggest user base the world has ever seen.”
This is all about bringing the internet to people who don’t have access to it today — which is where Koyfman gets those lofty numbers about billions of users, those are based on the number of people that aren’t currently able to connect to the internet, mostly (though not entirely) in developing nations.
Which is certainly a focus of a lot of companies — expanding the reach of the internet is both a social goal, improving communication and education and access to government services, among other things, and a business goal, connecting more individuals to the internet so you can sell them things or advertise to them. That’s part of the reason why Facebook is funding Internet.org, to try to bring basic internet services for free to cellphones in Africa and India, and why Google is experimenting with blimps and drones to try to extend the reach of the internet to the unwired and un-data-connected corners of the earth (among lots of other projects at lots of companies, of course).
This isn’t a little experiment or social investment made by a giant internet company, though, this is apparently a little for-profit operation that we maybe haven’t heard of. So what is it?
Well, after the pitch reminds us that this is a tiny company, and that this is like getting in super-early on a venture capital-type investment so you can become a billionaire like Peter Thiel or Bono (“Just think of the profits you could earn as a $50 million company rapidly expands into a $10 or $20 billion empire” … please don’t hold your breath), we get some more clues…
Koyfman talks about being at an exclusive invitation-only conference with fund managers and analysts in California recently, and about the presentation made by this company that stood out:
“… within two minutes of the start of the presentation, I knew this one was going to be unique.
“It was clear as day that I’d found the best investment opportunity of the year… perhaps even of my career.
“What Makes a $600 iPhone Obsolete?
“In a room full of people taking notes on the latest laptops or texting on the latest smartphones, the most amazing piece of technology in sight was a simple, Spartan tablet that looked vaguely like a first-generation iPad.
“Adding to the underwhelming appearance was some underwhelming performance.
“It ran at 2G speeds — which, to a person used to 4G LTE or wireless connections, would feel damn near dialup quality.
“And yet this was a game changer… the definition of a disruptive innovation.Are you getting our free Daily Update
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“The most important thing here wasn’t speed, style, or even the resolution of its plastic screen…
“The most important thing was its price.
“This tablet, complete with cord and everything else you’d need to get online, costs less than $40.
“That’s about one-tenth the cost of a basic iPad Air — an unheard-of cut in price.”
So… they make a really cheap tablet that processes at 2008 flip phone speeds? What else do we learn about them?
“It was the company’s next product — the one that dovetailed with this amazingly cheap yet functional piece of hardware — that sent chills up my spine.
“The tablet was custom-built to work with a new kind of Internet service.
“Just like the hardware, the software that came with it and the network on which it ran wasn’t the fastest, fanciest, or most stylish.
“But just like the tablet that hosted it, it was the cheapest… ever.
“The holy grail of market niches in a market where cost is the main point of resistance.
“At a cost of just $0.50 a month to the user, this company had figured out how to do what every major tech brand had considered impossible…
“It compressed the bandwidth by a factor of 30 — three times denser than any other company had been able to — and without losing any resolution.
“And by doing so, it singlehandedly made all of its competitors, with their multibillion-dollar market capitalizations and famous brand names, obsolete.”
Our secret stock?
Thinkolator sez this is DataWind (DW in Toronto, DWDZF OTC in the US), a fairly old 2G India-focused Web Browsing company that used to be traded in London and has now switched to Canada, where they’ve always been headquartered, for their listing with an IPO, raised some cash, and set about doubling down on their efforts to sell super-low-cost tablets and phones that are bundled with low speed (but enhanced, using their mediation) internet access.
They have been around for a long time, and have tried to tackle other markets in the past — including the US. Their PocketSurfer was available back in 2005 and was partly based on the same technology they’re using to provide internet access over low-speed 2G networks in India — as I understand it, they effectively run through their own cloud servers which pull down basic webpages, convert them into reduced-size images with some appropriate click functionality, and download those much smaller files to mobile devices.
The advantages of this are twofold — first, that you can browse the internet, albeit in a very limited manner (no audio or video, no flash or fancy stuff) on old cell phone networks; and second, that the demands on the device in this closed network are not nearly as onerous, so you can sell phones (and now tablets) with less powerful chips, less memory, etc., and therefore make them cheaper.
So this is really going for the lowest cost possible. They sell their PocketSurfer smartphone and Ubislate tablet in India with bundled (for the first year) internet access, which is resold from giant Indian cell phone (and everything else) provider Reliance, starting at 3,000 Rupees for the phone and 4,000 for the tablet, with added or higher-speed options up to about 10,000 Rupees. That translates roughly to an entry level price of $45 and a maximum price, for their fanciest product, of $150, and that first year of 2G internet access and use of DataWind’s cloud servers that translate and deliver the shrunken websites is apparently included. They have in the past sold netbooks, too, using this same low-grade internet access, but that doesn’t appear to be part of the business now — and their big push a few years ago was to develop these low-cost tablets in partnership with the Indian government as a tool for education… that was a tumultuous project (covered pretty well here in a NY Times article) and is no longer the company’s focus, but it may be that they’re still selling to the government.
DataWind is overwhelmingly focused on the Indian market, and likely will be for the foreseeable future. India accounts for 95% of their revenue and growing, though they do have some small amount of business in Canada and a legacy business in the UK. They’ve introduced their tablets in the past in the US, selling them for $40 or bundling some of them with AT&T service for a year for something in the neighborhood of $100, but apparently that didn’t take off. I’ve seen articles about those tablets being available with bundled service in the US in the past, but I can’t find them available now — probably because much, much more capable tablets are now available on installment for $10 a month, with another $10 a month for service in the US, and those can handle video streaming and all the rest of the stuff that people actually use the Internet for… and Amazon, pushing the bar still lower, is even going to sell its latest Kindle Fire for $50 this holiday season, it appears. Price pressure is everywhere, and you probably need an extremely price-conscious market — like entry level internet users in India or other frontier markets in Africa, South America and Asia — to make this low-spec of a product appealing. That means it’s hard for me to judge whether this is a useful enough product, or what the appeal will be, but they are getting some sales growth with their new products this year — and the money they raised in the IPO is effectively bankrolling this expansion so far.
And one more ridiculous but seemingly reasonable-sounding projection to share with you:
“Even 1% market penetration in China and India would yield gross earnings nine times greater than the company’s current total market capitalization.
“That highly conservative projection has the potential to make this $50 million company into a billion-dollar operation in a year’s time.
“For current shareholders, that would yield gains of 1,600% — again, that’s a lowball figure.
“And 10% market penetration? Well, that would return profits equal to more than 150 times your money back… the same sort of upside potential big investors like Reid Hoffman and Peter Thiel made when they took their early positions in Facebook.”
This is when investing in speculative things can get dangerous, when you start to assume that your wildly optimistic projections are actually conservative because they sound small. If these guys get 1% of both the Chinese and the Indian market, even if that assumed just the folks who already have mobile phones in those markets is the potential market, they would be flipping head over heels ecstatic… and, perhaps, panicked about how to manufacture that many devices and upgrade their service to handle the traffic. There are about a billion mobile phones in use in India, so if we assume that this company, with their ultra-cheap device and service, gets 1% of that market that would be 10 million devices.
China’s market is similar, a bit bigger, so we could maybe upgrade that to 25 million devices if they got 1% of the total market in those two countries. In the last quarter announced here, they have been ramping up volume considerable with sales of their new cheaper phone model that bundles internet access, and sold a little over 200,000 units in India (they’re not really available anywhere else in any volume, and the notion of them getting a toehold in the insanely competitive low-end Chinese market).
If that continues at this growth rate it is indeed possible that they could get to 10 million devices in India — doubling every year, that would get them over 10 million within five years. If they sell mostly the lowest-end PocketSurfer device (I don’t think they’ve announced that their product mix is recently), we can assume that they get maybe $60 in revenue for each device. Their gross margin now is about 24%, and they see that dropping because the Chinese manufacturer who they’ve hired to assemble their products is setting up shop in India, which will mean they can get rid of the 10% import tax — if the margin improves to 22%, which might be possible, then you can create a fantastical future where they’re generating revenue of $600 million in five years and getting a gross profit of $120+ million.
Assume that they can keep their marketing, selling, general and R&D expenses at 10% or less, and they could be earning $60 million in profits in five years. That’s a huge ongoing growth story if it happens, and it assumes a lot of optimism and that they can keep growing, but it’s not entirely without merit as a wild-ass guess from an optimist IF you think the company and their product are compelling. If they trade at 10X earnings at that point the stock could have a $600 million valuation, so if they haven’t had to sell any stock to raise working capital (to invest in inventory and manufacturing capacity) before then, the stock could be at $25 or so.
That is not at all saying that they will be, or that I think they’ll reach 1% of Indian mobile phone users, just that that’s one potential scenario if they do reach that kind of saturation over the next five years — and I think their chances of reaching that in the next year are essentially nil, and that, frankly, their technology of compressing and sending shrunken versions of basic websites seems to me to be destined to get overwhelmed by new technologies and networks within a lot less than five years… but that could just be my first world bias coming through, there are places still throughout many emerging markets where only 2G mobile cell networks are available, and maybe we’ll continue to see those low-tech pockets that need a service like this for many years to come.
Right now, the shares are just under C$2, a little under US$1.50. They are getting at least some traction with their new products, they are making the rounds of conferences to appeal to investors and show off their latest tablets and phones (I assume it was the June LD Micro conference that Koyfman attended, since the Angel Investing pundits seem to love finding penny stocks at that conference, but they’re making the rounds of lots of confabs), and where the revenue goes from here I don’t really know. Right now, they’re selling 200,000 units a quarter as of the end of June and growing sales sequentially (quarter over quarter) in the high teens a couple quarters thanks to their new products and bundling in India, and they’re ramping up distribution outlets, so that’s a good sign, and they are pretty close to breaking even on EBITDA and, if they have a few more good quarters, perhaps getting close to actually making money. Worth $30 million, which is the market cap of the company right now? More? Less? I can’t say that the company appeals to me, but I have a hard time putting my finger on the reason… so you can make that call — let us know your thoughts with a comment below.