We believe that Motricity ("MOTR") is a timely short opportunity with significant downside potential (potentially terminal). I will keep this write-up brief as this is timely and may not be for everyone since borrow is tight. In the past two months, MOTR's stock price has increased by 150%, largely on the back of two vague press releases and a "speculative buy" recommendation from Jim Cramer last week.
MOTR, which IPO'd in June, provides a basic software platform that allows wireless subscribers who do not have smart phones to access mobile data, including browsing the Internet, sending and receiving email, updating social network sites, purchasing ringtones, etc. By way of background, Motricity as it exists today was formed when the company purchased the mobile division of InfoSpace for $135mm in cash in December of 2007. Before this acquisition, MOTR was a small mobile services company with ~$30mm in annual revenue. InfoSpace Mobile's legacy mCore platform is currently MOTR's principal product offering.
The company boasts a market capitalization of approximately $835mm and an enterprise value of $815 million (~6x what it paid for InfoSpace Mobile), despite playing in a competitive industry with strong secular headwinds (as smartphones proliferate), never having generated positive GAAP operating profit and having massive customer concentration (AT&T and Verizon account for over 75% of revenues).
The bull case espoused by the sell-side (primarily investment banks that ran the IPO) is simple - mobile data usage is growing secularly and should be able to drive incremental revenue from both existing wireless carrier customers and new contract wins (primarily international).
We find MOTR to be a compelling short for the following reasons:
- MOTR's business model is dominated and will soon be irrelevant: The functionality that MOTR's platform provides is only relevant for non-smartphones. Several years ago, this technology would have made sense, but given where the industry is headed, MOTR's addressable market is shrinking quickly and their product will soon be completely irrelevant. You can look at Telesystems (TSYS) which faces similar risks and trades at 5x EBITDA and has half the enterprise value of MOTR despite having 3x the sales.
- Customer concentration: AT&T Wireless accounts for 50%+ of revenues, while Verizon Wireless accounts for another 25%. If either decided to end its relationship with MOTR, the results would obviously be disastrous. As context, TeleNav (TNAV), which provides a GPS application for mobile phones, recently renegotiated its contract with Sprint, a 55% customer. The renegotiated contract calls for an aggregate reduction in overall revenue to be paid to TeleNav from Sprint. While MOTR's platform is more than a single navigation application like TNAV's, this example should give investors pause about investing in a company with products that are fundamentally replaceable and sold to very large, powerful customers. TNAV currently trades at 3x EBITDA.
- Overexcitement about recent press releases: On October 12th, MOTR put out two news items that caused the stock to soar. First, the company put out a release announcing a "mobile as a service offering" using buzz words like cloud-based infrastructure, managed services, etc. that we believe have no material impact on their business. Additionally, the company put out a one-sentence 8-K (no press release) indicating that it had entered into an agreement with Reliance Communications (a large mobile provider in India) to deploy the mCore platform to Reliance's wireless subscriber base. We would note that no financial terms were disclosed. The stock proceeded to rise by 54% cumulatively over the next two trading days. It is important to keep in mind that wireless ARPUs in many of the international markets that MOTR is targeting are a fraction of those in the U.S (people in India are unlikely to pay much for this) and that MOTR's domestic ARPUs ($100mm+ of revenue on 35mm subscribers) are low to begin with. Again, this news didn't even warrant a press release or any financial detail at all.
Simply put, we think this is a timely short with the potential to be a zero or near zero in the coming years. Several factors have occurred to cause this company to be perceived as a high growth, mobile play when in fact it is a barely profitable company that is in the process of becoming technologically irrelevant.