Greenhaven Road Capital is the management company of the Greenhaven Road Capital Partners fund. Scott Miller is the fund’s founder and managing member. Recently, Greenhaven Road Capital released its Q1 2020 Investor Letter – a copy of which can be downloaded here. In its most recent Investor Letter, Greenhaven Road Capital announced that the Russell 2000 Index fell by 30.6% in the first quarter. However, the fund fell a couple of percentage points further over the same period.
In the said letter, Scott Miller highlighted a few stocks and Sharpspring Inc. (NASDAQ:SHSP) is one of them. Sharpspring is a global provider of marketing technologies. Year-to-date, SHSP stock lost 37.7% and on April 27th it had a closing price of $7.15. Its market cap is of $82.38 million. Here is what Scott Miller said:
“SharpSpring sells software that enables marketing automation, primarily to digital marketing agencies for small and medium-sized businesses. Fortunately, SharpSpring does not have large exposure to travel, retail, or restaurants. However, if a business stops all marketing or ceases to operate, they will cancel their SharpSpring contract. Marketing budgets are some of the first to be cut during difficult times. On the more positive side, SharpSpring pricing compares very favorably to competitors, so they may be more likely to win new business for those seeking a high-quality, lower-cost marketing automation solution.
Like any well-run company facing a sudden and unprecedented change in their operating environment, SharpSpring has revisited everything from staffing, to compensation, marketing, customer engagement, product road map, promotion, retention, and cash management. As a SharpSpring board member, I have a front-row seat to the process. Choices have been made to cut in some areas and invest in other areas. Will they be right? Will they be enough? Time will tell, but this is a smart and scrappy team, and my confidence in management has only increased.
As publicly disclosed, before the pandemic, SharpSpring had implemented a 35% price increase and bought a business that should add 10-15% to revenues relative to last year. In the absence of the pandemic, there was a pretty clear path to growth of 50%+ this year. SHSP shares ended the quarter trading at an EV/Sales of less than 2. Absent a multi-year depression, the opportunity exists to see very substantial returns from here.”
In Q3 2019, the number of bullish hedge fund positions on SHSP stock decreased by about 20% from the previous quarter (see the chart here).
Greenhaven Road Capital comments on Digital Turbine
In the said letter, Scott Miller also highlighted Digital Turbine Inc. (NASDAQ:APPS) stock. Digital Turbine is a global mobile technology company. Here is what Scott Miller said:
“Digital Turbine serves as a neutral third party that works with wireless carriers to preinstall apps on new cell phones, then sells the slots to app-driven companies like Uber, Amazon, and Netflix. In the long term, Digital Turbine’s success will be driven by the number of Android phones it controls (carrier/manufacturer partnerships) and the revenue per device it receives. The company has worked to expand both carriers and manufacturers as well as to add revenue streams that are not just associated with app installs upon activation.
I presume the share price got smoked in the first quarter because people locked in their houses are unlikely to activate new phones. In the hierarchy of positioning for Covid, being tied to new phone sales is not as bad as owning a bar, but it is not telemedicine. As it is hard to argue with that logic, I presume installs in late March and April from their Verizon and AT&T contracts will be down significantly. However, I would posit that perhaps there is still opportunity in Digital Turbine.
For starters, yes volumes will be down, but revenue per device may hold or actually continue to increase. In fact, on a recent investor call, management indicated that there are instances where they get paid only when an app is opened on a device. As people are stuck in their houses browsing on their phones, they are opening more of these apps – thus leading to revenue for Digital Turbine. In addition, the company is adding new carriers and expanding their presence within manufacturers such that their gains with Samsung, LG, and Telephonica will help offset some of the declines from existing customers.
The company also closed on a very significant acquisition during the first quarter. Mobile Posse provides content for the home screen on T-Mobile and other carriers’ phones and shares the advertising revenue. This is a high quality recurring revenue business that is highly synergistic with Digital Turbine, has minimal customer overlap, and should be afforded a higher multiple. It does not take wild imagination to see Digital Turbine selling their solutions to Mobile Posse customers and vice versa. The deal was done at 1X revenue, which should be highly accretive to Digital Turbine and, as a cherry on top, the day after the deal was announced, the U.S. government approved the long held-up merger between T-Mobile and Sprint. Now, we don’t know the T-Mobile/Sprint merger integration plans, but it is at least plausible that the Mobile Posse business will grow if it is integrated onto Sprint phones. It should be noted that none of the Mobile Posse revenue appears in historical financials as the deal just closed on March 10th , so many of the quantitative investors may not be factoring in the $50M in revenues and $10M in EBITDA that will come from the transaction.
There is well-placed fear of a recession in the United States. A recession may extend upgrade cycles as the year progresses, which would be negative for Digital Turbine, but consumers are unlikely to give up their phones en masse even when money is tight. In addition, as the year progresses and carriers roll out 5G services, there will likely be tailwinds from upgrade subsidies as it is in the carriers’ economic interest to move traffic to 5G.
There is also the immediate issue of the shutdown. Is demand lost? Will it come back? While discussing the rebound in phone demand seen in China as the economy opened back up, the CEO of Qualcomm said on CNBC, “I think the biggest issue you have to be prepared for is when this thing snaps back it snaps back hard, and make sure you’re in a position to take advantage of it.”
APPS ended the quarter with a market capitalization of approximately $400M, which is less than 2X estimates for FY2021 revenue and 6X adjusted EBITDA. Thanks to the Mobile Posse acquisition (done without issuing shares) and gains in the core business, revenue will likely grow at a rate of 35% or higher. New phone activations will be impacted in the short term, but I am not ready to bet against humanity’s love of having a device in their hand, or advertisers’ desire to reach those consumers. Digital Turbine is positioned for revenue growth, margin expansion, and multiple expansion, despite what the share price said on March 31 st .”
In Q3 2019, the number of bullish hedge fund positions on APPL stock increased by about 73% from the previous quarter (see the chart here).
Disclosure: None. This article is originally published at Insider Monkey.
