KeyStone’s Stock Talk Show, Episode 193
Great to be back with you this week and to be kicking off an exciting new year. We have a packed show for you. Aaron will regale us with a review of the markets in 2022. The TSX versus US performance, top and worst performing sectors, momentum at the end of 2022, and discuss if energy continue to outperform in 2023. I will answer a listener question in our YSOT segment on Canadian Fintech Mogo Inc. (MOGO:TSX), which has entered a restructuring plan to try and deliver profitability for its shareholders. The stock is down over 75% in the last year – something needs to change. And Brennan proves to us that he can read, “who knew”, by giving us some quotes from a book he is purportedly reading by legendary investor Peter Lynch in our Investor Spotlight segment. Finally, Brett handles are Star and Dog of the week. The later being embattled once tech darling Tesla, Inc. (TSLA:NASDAQ) which continued its precipitous slide over the past week and is down 70% over the past year. The former, and star of the week, is little known Canadian Micro-Cap, a name we have highlighted for the past several years in our Canadian Cash Rich, Small-Cap Report, IBEX Technologies Inc. (IBT:TSX-V) – the stock is up 58% over the past month. Brett lets you know if it is sustainable
I welcome my cohosts – Aaron, and the Killer B’s – Brennan and Brett.
Introduction
Mogo Inc. (MOGO)
Your Stock Our Take
Mogo Inc. (MOGO:TSX)
Price: $0.82 – stock is down 77% over the past year and over 94% since its 2021 highs.
Market Cap: $61.90 Million
Yield: No Dividend.
Company Description: Mogo Inc. is a fintech company which states it has 2 million members which it assists with simple digital solutions to get in control of their financial health while also making a positive impact with their money. Through the free Mogo app, consumers can access a digital spending account, get free monthly credit score monitoring and ID fraud protection and access personal loans and mortgages. The company also owns MogoTrade and app that offers commission-free stock trading and together with Moka, Mogo’s wholly-owned subsidiary bringing automated, fully-managed flat-fee investing to Canadians.
Recent Financial Results:
The Good
Cost savings initiatives from Q2 drive improvements in cost structure – OPEX was down 24% in
Q3 ad There was a 32% improvement in Adjusted EBITDA.
The OK
The balance sheet, as at September 30th – is ok. In its presentation, MOGO states that it holds $106 MILLION IN CASH, INVESTMENTS & DIGITAL ASSETS.
We see $35 million in cash (down from $69 million at the start of 2021), and “Investment accounted for using the equity method at: $56.13 million, down from $103.82 million at the start of 2021. This is basically the company’s strategic investment in Coinsquare Ltd., one of Canada’s leading digital asset trading platform – trading volumes are down significantly and we will guess that there may be another write-down in the value of this investment coming soon.
The company also has $47.7 million under a credit facility and $39.69 million in debentures. The credit facility is at a variable rate – now substantially higher and is subject to certain covenants and events of default. As at September 30, 2022, the Company was in compliance with these covenants. But if asset values on the balance sheet continue to drop and cash flow is negative it is something to watch. Not in trouble as at the last report, but something to watch.
The Bad
Adjusted EBITDA was still negative at $(2.8) Million and the adjusted net loss was $(8.4) Million. As at the end of Q3, Mogo has an accumulated deficit of $(239) million.
Our Take:
Start-ups are great and new tech and growing a user base takes a great deal of time, but at some point a company has to start generating cash flow and operate off that cash flow. Mogo, is not a terrible venture. In fact, it is admirable what the company has been able to do generating 2 million members. But those members need to be monetized into a profitable model – otherwise, for shareholders, what is the point of the venture.
Mogo’s current restructuring plan is focused on accelerating the company’s path to profitability – this is good, but the company expects a 10-15% impact on quarterly revenue in the near term due to cost cutting essentially. So, without the constant spending, growth suffers. The question is, was the company just buying growth in an easy money market with a business model that just is not that profitable if at all. The market is clearly stating they are skeptical. There is likely some value here in the customer base and tech and perhaps MOGO is purchased on the cheap at some point, but we do not invest based on that criteria. We will Monitor MOGO’s restructuring to profitability progress, but prefer to invest in cash flowing growth businesses at reasonable prices versus cash flow negative businesses with the “hope” of future profitability. Too much risk.
Dog of the Week Telsa (TSLA:NASDAQ)
Tesla symbol TSLA on the NASDAQ designs, develops, manufactures, leases, and sells electric vehicles, and energy generation and storage systems in the United States, China, and internationally. The company operates in two segments, Automotive, and Energy Generation & Storage.
Tesla saw a brutal 2022, and 2023 has not started off any better, falling 12% on the first trading day of the year. The stock is down 41% over the past month, trading at $108 with a market cap of 339 Billion.
Tesla’s drop over the past year and specifically the past month can be attributed to three core factors, macro economics, weakening delivery performance, and the CEO Elon Musks actions.
First the macro conditions, interest rates rising impacts debt holding companies but also growth companies. Tesla does have a net cash position so it actually benefits from higher interest rates ever so slightly in that matter, BUT the issue arises when valuing high growth stocks, the reason is a bit technical. The basic is when interest rates rise future earnings which the core valuation of Tesla relied on is worth less today as you can invest in other products earning a higher rate. I normally wouldn’t bring this up because it effects every financial asset to varying degrees, but Elon Musk blamed the federal reserve hiking rates for the collapse in price, which is true but isn’t the only reason or in my opinion the dominant reason.
But a factor Elon can control is his own actions, which whether you agree with him or not has impacted the share price. Elon’s takeover of Twitter and subsequent actions on the platform has left a bad taste for many customers and investors, as well he has offloaded 20 million of his personally held shares mid December. As the company’s image and vision is entwined with Musk’s views and actions, his recent activity has hindered the stock.
But perhaps the most important factor for the company’s intrinsic value, the company is seeing a slowdown in operations. The company’s Q4 2022 delivery report came in below expectations for both analysts and Telsa. The company’s production grew 47% over the year, so by no means something to scoff at it was just less than what investors expected on average which was slightly higher at roughly 50%. Another thing to note is that production outpaced delivery which can be signal of weakening demand.
The full annual earnings report is released on January 25th which could result in another spike up or down, but for now it is our Dog of the Week.
Star of the Week Ibex (IBT: TSXV)
Ibex Technologies Symbol IBT on the TSX venture exchange, is a biotechnology company specializing in the manufacturing of enzymes. IBEX sells the enzymes directly to third parties manufacturers of medical devices, quality control labs, low molecular weight heparin manufacturers, and academic research institutions.
The stock has jumped 58% over the past month and is currently trading at 0.76 a share. The jump in price can be partially attributed due to its Q1 2023 earnings being released on the 21st of December.
Earnings and revenue were effectively flat compared to the previous year, but weakness has been expected as Ibex benefitted from increased demand for its haemostasis tests during COVID, and since COVID-related hospitalization decreases, the demand for the product has dropped, causing headwinds for the top line. Additionally, the company is expecting weaker earnings in fiscal 2023 due to R&D spending on its Diamaze line. Together the two effects create negative expectations for revenue and earnings for fiscal 2023, so why did it go up?
This appears to be a case of being a sparsely followed microcap with justifiable expectations of lower results, so when the company is still similar to the previous year, it can become a strong catalyst for price movements. Effectively any news that isn’t negative can be seen as positive news for a company of this size and strong financial position.
We have featured Ibex before in our Cash Rich 2022 report as well as the Canadian Growth and Opportunity report. The company does have a large cash holding of roughly 8.2 million, over 40% of its market capitalization. The cash does create a rough floor on the stock price which is was nearing at the start of 2022.
Not saying it will but many microcaps which are profitable and cash-rich tend to be takeover targets, even if that does not happen does not change that it is our Star of the week.
Peter Lynch
2022 Market Performance
