Tuesday, April 17, 2018

Liberated Syndication

Podcasts are a huge and growing market. In the spirit of selling shovels in a gold rush, Liberated Syndication (LSYN) hosts podcasts and provides other services (e.g. advertising) to podcasters.

LSYN believes itself to be the market leader in podcast hosting, distribution and monetization. This is a good business with recurring (subscription) revenues in a fast-growing industry, so one might expect to see Mr. Market place a huge multiple on it. But it hasn't. This OTC-listed stock trades at just 10 times my estimate of the company's current earnings power.

The reason for this is probably management.

They have a checkered past, having purchased outright what turned out to be a Chinese fraud a few years ago. The company has been working to sever ties with its past, but as of last year's annual report the company's largest shareholders (11.2%) was languishing in a Chinese prison. I can't tell if he still owns his shares, because it's possible the company has just diluted him out of his 10%+ shareholding, which brings us to another source of shareholder anger.

The company's share count has increased almost 50% year over year thanks to very generous restricted share grants to a number of people, but none more so than the company's CEO Chris Spencer. Spencer defensively makes the point that the share grants are tied to very specific milestones, some of which are very difficult to achieve. He's right about this, as some of these shares will probably end up canceled unless the company's valuation goes bonkers. But on the other hand, a lot of the share grants were tied to easy milestones, some of which have already been achieved just by sitting tight. Furthermore, the share grants that are real reaches still give Spencer more votes with which to subdue shareholders who are unhappy with the way the company is run. This kind of behaviour is bound to lead to a lower market multiple.

Because some of these high milestones (e.g. share price, which is $1.57 today, must reach $10) may never be reached, the market cap today probably overstates the company's effective market cap. This should probably factor into your valuation.

When I first bought shares, management refused to talk to me (ignored e-mails, never returned phone calls), but this attitude towards investors appears to be changing. Last week, the company hosted its first investor conference call, in which it took questions beforehand (including mine) and answered them on the call. Investors got a little insight into what management is looking for (recurring revenue was a repeated theme) and some catalysts that might propel the valuation upward.

The most important one appears to be an uplisting to the Nasdaq, which is expected before the end of the year. This would need to be preceded by a reverse-split to make the share price respectable, so watch out for that as a sign things are moving forward.

Disclosure: Author has a long position in shares of LSYN

No comments:

Follow by Email