It has been a while since we pushed a trading idea at Nordic Investor. As a regular reader, you know that we are bullish on the app market and we recently came across a US micro-cap story which we believe is worth a closer look.
Number of shares outstanding: 57,231,252
The company and its story
Bitzio is a young US start-up company which has the ambition to become a leading mobile media and app development company focused on connecting fans of large entertainment and sports properties with the players, celebrities and teams they love. With the “Bitzio Engine” incorporated in its apps, the company captures valuable user data and drives increased user monetization.
Bitzio’s strategy looks as follows: Rather than going the traditional way of building the app first and then hoping the audience will come, Bitzio tries to do it the other way around. The company licenses media rights of sports and entertainment properties with millions of existing fans and then it uses these rights to create mobile apps and web experiences for these existing fan bases. With its long standing relationships with some of the largest international sports clubs and entertainment properties in the world, Bitzio has good prerequisites to acquire rights and licenses to use teams, logos and players in its apps. Once a relationship within the targeted verticals is established, Bitzio develops and deploys a suite of apps centered around a sports figure, team or celebrity and market to those fans who already have substantial interest. When a fan has downloaded one of their apps, Bitzio uses its behavioral analytics to cross sell and upsell other Bitzio apps to them. With each targeted celebrity, team or player, the company plans to deploy 15-25 targeted apps for each fan base with the goal to achieve higher than usual download metrics, revenue and customer lifetime value. Bitzio aims to generate revenues via 5 possible channels: download of apps, in-app sales of premium content, advertising, merchandising and finally sponsorship.
The company is built on a series of acquisitions beginning in 2011 with the takeover of Bitzio Corporation, a developer of mobile apps. Later on in the same year, Bitzio acquired Thinking Drones, and DigiSpace Solutions. Thinking Drones is a developer of iPhone and Android apps under the “Free the Apps” brand. Founded in 2009, Free the Apps has created many highly successful apps, including “Top 10” overall apps featured in iTunes App Store. Their success is not only creating top revenue generating apps but also using that acumen to help other developers get the visibility their apps need in the crowded mobile apps space. Using proven strategies, Free the Apps provides developers with social and online solutions to get their apps in a “top” list and extend their reach to extensive customer base. With almost 40 million downloads and counting, some of Free the Apps successful free apps includes Convert Units for Free and Crop for Free. It is, however, our understanding that the main focus in the future will be on developing own apps, rather than providing other developers with development tools.
In 2012, the company went on to acquire Germany software and mobile app technology developer ACT Smartware, mobile game developer Knuckle Face and Motion Pixel Corporation (MPC). MPC is expected to further open up doors to sports teams and other affinity groups that have strong interests in mobile applications to enhance brand names and reach consumers. In the deals completed so far, Bitzio has managed to retain key personnel which seems essential for Bitzio’s strategy.
In 2011, Bitzio reported total revenues of USD 579,386 of which all was recorded in the final quarter. In its recently reported H1 2012 results, the company recorded revenues of USD almost USD 1m, of which roughly 60% came from the developer tools and 40% from mobile apps. The net less of around USD 6.6m, included a one-off goodwill write-down following two of Bitzio’s latest acquisitions of in total USD 4m. Given the fact that Bitzio has so far been almost exclusively in a developing phase with only limited operations, this seems not overly alarming. At the end of Q2 2012, Bitzio had cash available of USD 55,637. Based on current revenues, cash on hand and a current net monthly burn rate of roughly USD 165,000, Bitzio will need to continue to raise money from the sales of securities to fund operations.
In mid-August, Bitzio released its first app according to the new strategy in a cooperation with former Colombian soccer player Carlos Valderrama, known as “El Pibe” (“The Kid”). With his signature blond, permed hair, Valderrama was one of the most colorful soccer players in the 1990s. He was a member of the Colombian national team in the 1990s and between 1985 and 1998 he represented his country in 111 full internationals and scored 11 times, making him the most capped player in the country’s history. In 2004, Valderrama was included in the FIFA 100, a list of “greatest living footballers” chosen by soccer legend Pele to celebrate the 100th anniversary of FIFA. On http://carlosvalderramaapps.com/ you can have a look at the plans Bitzio has with this franchise. So far a simple dribbling and goal keeping game has been published under the “El Pibe” name and several other apps are in the pipeline. The iPhone app can be downloaded for free at http://itunes.apple.com/app/id546308970
Elsewhere, in early August, Bitzio signed a cooperation agreement with ROAR, one of Hollywood’s most successful talent management companies to team up to finance the development and launch of apps for some of the world’s most popular entertainment properties and talent, including actors, celebrities, musicians and professional athletes. At this point, no names of the potential celebrities were announced.
Why buy now?
Trading currently around USD 0,20, Bitzio is of course an absolute micro-cap and high risk story. The current market cap is a mere USD 11m. At this point, we think it is far too early to predict potential revenue or even earnings development for the company. However, we are impressed by management’s consistent implementation of its strategy. A lot of puzzle pieces seem in place and Bitzio has started to publish it first app within this strategy a few days ago. We think it is highly likely that more will follow and while we cannot assess their revenue potential at this point, we expect increased attention for the case the more apps will be released. US equity research boutique NBT Equity Research tries to value Bitzio using a “value per user” approach. They put a value of USD 10 per user on a targeted user base of 100m users by 2014 (at this point, Bitzio is beyond 40 million downloads and 10 millions users), implying a company value of USD 1bn. Needless to say that they are pretty bullish on the stock. I am not sure if I necessarily agree with this valuation approach as it is not 100% clear yet how these users will actually translate into earnings. Nevertheless, we are willing to give Bitzio the benefit of the doubt and anticipate positive newsflow over the coming months. The market for smartphones and tablets is poised to grow and so is the app market. We like the story and highlight Bitzio has a high risk trading Buy.