Monday, August 29, 2011 Quite Cheap

Shares of have fallen off a cliff recently. This was a net-net stock already, but it has still fallen more than 30% in the last month alone. As a result, the company now trades for a discount of almost 50% to its net current assets. Despite this massive discount, however, shareholders should be cognizant of actions on the part of management that could erode the current margin of safety.

Bidz revenue is down 22% from year-ago levels. For investors buying at a discount to assets, this isn't necessarily a bad thing, as it can free up assets such as receivables and inventories, releasing cash for shareholders. This isn't how management operates, however, as inventories have been on the rise over the last several quarters, as the company attempts to expand(!) its way out of trouble.

At the same time, operating expenses have risen while revenues have declined. This is occurring as the company attempts to push a new brand on consumers, and spends marketing and software dollars to make it work. As the company's president notes:

"[W]e see significant opportunity to grow the business as aggressively as possible through additional investments in operational infrastructure, user experience and marketing."

Bidz' stock price would likely see very strong returns if the company simply cut costs commensurate with its new revenue environment, allowed working capital requirements to shrink, and applied this excess cash to buy back shares or pay a dividend. Unfortunately, it's clear management would rather swing for the fences while risking the company's remaining assets in the process. As such, downside risk is abnormally high for a company trading at such a large discount to its net current assets.

Disclosure: No position


Anonymous said... turned up for me as well on a net net screen, but like you i saw that so much of its current assets seem to be tied up in inventory that i became a little wary of the company. Would you agree?

Anonymous said...

If management is working at odds with the shareholder's interest, why invest?

I don't care how large the discount is, management is going to find a way to get over on shareholders if they are so inclined.

There are many opportunities to invest in good companies with good management, why screw around with this?

I would call management out, and write up you opinion & findings. Alert any potential investor you can!

Saj Karsan said...

Hi Anon1,

I could live with the inventory I think, but for me it's management's intentions that have me avoiding it.

Anonymous said...


My sister-in-law works for Bidz. Says the CEO drives a big fat Rolls among other fancy cars and has an office the size of full length basketball court.

So yeah, sounds like he's a fence swinger at everyone else's expense, shareholders included.

I give this company 4-5 quarters before it's out of money.