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MeetMe Inc.

 

MeetMe, Inc. (MeetMe) is a social network for meeting new people in the United States and the public market for social discovery. MeetMe makes meeting new people fun through social games and apps, monetized by both advertising and virtual currency. The Company has 60% customers coming from mobile. MeetMe is the social gathering place for the mobile generation. The Company operates MeetMe.com and MeetMe apps on iPhone, iPad, and android in English, Spanish and Portuguese. The Company provides advertising facilities through MeetMe Ads and Social Theater. MeetMe Ads had over two billion page views monthly, over 78 million registered users across the world and approximately 50% of activity on mobile, as of November 17, 2012. Social Theater consists of traditional marketing and social networking.

 

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Investment Thesis

 

MeetMe Inc is quickly becoming a popular mobile application for people in  a casual dating environment to connect. The company is trading at price multiples far below similar companies and as such is undervalued.

Key Comparables (from Oct 28):

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From looking at the comparables (these were the best I could find) there are few important takeaways:

  • MeetMe has much cheaper price to book and price to sales ratioa. It basically trades at one tenth the multiples of larger social sites.
  • MeetMe has a very high gross margin. It should be noted that most of these companies are pretty different businesses and they probably  account for cost of revenue in different ways.
  • The EBITDA margin for MeetMe is negative while the rest of the comparables are positive. This could be an indication that MeetMe needs to see significant growth before generating a net income. But when you look at the amount of money they are allocating to R&D, they could easily generate a profit if they wanted to cut back.

So based on the comparables we have learned two things: 1) MeetMe is cheaper than the similar web services, but 2) needs significant growth to be profitable. Here lies the difference in revenue growth (most recent quarter over quarter):

 

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It’s clear that part of the reason why MeetMe is so cheaper is in large part due their decline in revenue, whereas everyone else (except Yahoo!) is showing strong growth. But let’s try to “peel back the onion,” to see if this is the beginning-of-the-end or just some restructuring. First let’s consider the quarterly revenue for the last 10 periods.

 

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It is clear that revenue has dropped; in part thanks to the discontinued operations of Quepasa Games which contributed $1,144,443 in 2011 and $840,190 in 2012. But that doesn’t explain why revenue dropped in 2013. From last year’s annual report, we can see that they had a growing number of active users:

 

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But in the first two quarters of 2013, the total number of active users (web and mobile) declined, while the total mobile users increased:

 

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Also, based on the annual report, it appears that the company blames a large loss in the revenue based on the amount they are generating out of web users:

 

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Well claiming they are getting more revenue per monthly active user out of their mobile sector which we learned before, is growing:

 

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In the last quarterly report, MeetMe management had the following reasons for the decline in revenue:

  • They are trying to have less ads on the mobile app to make it more user friendly.
  • The advertising rate for online and mobile has decline (thus less revenue).
  • Decrease in revenue generated from Social Theatre on competing platforms (their proprietary advertising video player is less demanded).
  • Let’s take a quick look at their 2012 income statement:

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Obviously from looking at this you will notice that they lost money even though they generated over $46.7 million in revenue. But the bigger take away is that they invested 29.5 million in research and development. It is difficult to say what kind of a return they will get out of that, so let’s remove this from the expenses and take a look.

 

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On a per share basis, that would work out to $0.50 per share and with a reasonable price multiple of 12, the stock should be trading around $6.00. That being said, research and development is an operating expense that shouldn’t be removed entirely, but it gives you an idea of a reasonable upper limit.

 

Risks

My main concern is that their data isn’t accurate; I base this on the research I found that indicated there seems to be a great deal of spam bots on the site. I digress that a company listed on a public exchange in the US is audited and wouldn’t mislead shareholders on such basic data. Here are some of the other significant risks to keep an eye on:

  • changes in the number of registered members;
  • changes in visits by active members;
  • failure to generate increases in revenue;
  • failure to meet the challenges of monetizing mobile users;
  • competition;
  • loss of major advertisers;
  • departure of key personnel;
  • the revenue is actually based on spam and will ultimately decline;

 

Recommendation

Overall, I am giving this stock a buy recommendation. I feel they have are underpriced and should be trading a price to sales multiple at least 2 times higher. I am setting a price target for October 2015 of $5.00.

 

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