I am sure this happened to a lot of us. Every time I look at a chart of a stock that has grown 1000% in the past 12 months, I ask myself why didn't I found this stock 12 months ago. We all hope we can find one of these and buy ton of them at the beginning. The truth is, few had the foresight at the beginning. Many bought at the beginning but sold too soon. Very few can stay with a stock on the entire run. I recently talked to a guy who rode EQIX from $3 to $70. He told me he never thought it can come to this far, he just liked the company and stayed. And he is now looking for another double!
Now with a good measure of confidence, I think I found one. This one can potentially give me 3000%! Again, this is only my best case projection. It is not the fact and should be read with a realistic mind. Please make your own decisions and manage your investment wisely.
GoAmerica Inc. (GOAM) is a telecommunications company. It has a small float of 2m. Market cap is only 10m. It currently trades at $4.91.
I have done some digging and came away shocked.
My price target is $130 next year!!! The number is unthinkable, but it actually is possible.
GOAM's stock price has been a dog since Dot Com days. With split adjusted price, it has dropped from high of $1400s in 2000 to the low of $2.75 this year. The company has tried different businesses, but never succeeded in any of them, until now.
IP RELAY SERVICE
In early 2005, the company launched its IP Relay Service website i711.com. IP Relay Service is a service for deaf, hearing impaired and people with speech disabilities. When a hearing impaired person wants to make a telephone call, he/she goes to this website, type in the telephone number. At the other end, an operator relays this call to the other hearing party. The deaf person communicates with the operator in text, the operator then communicates to the other hearing party with voice, thus making the communication possible between the deaf person and the hearing party.
The IP Relay Service is free. The company logs the minutes and gets reimbursed by FCC. – The FCC oversees IP Relay Service as a result of their mandate in the Americans With Disabilities Act (ADA) to facilitate the provisions equal access to individuals with disabilities over the telephone. Current reimburse rate for IP relay is $1.293 a minute. The fund for relay services is paid by telecommunications taxes.
Since 2002, the IP Relay Service market is growing by leaps and bounds with a 74% compound annual rate (See this presentation)-- Partly at the expense of traditional TTY relay service, partly due to the easy accessibility of Internet. In the quarter ended on Sept 30, 2006, the total IP Relay Service market has exceeded $28 million.
Currently, there are 7 players in the IP Relay Service market. Even though GoAmerica is a late comer, it has teamed up with Nordia -- a long time relay service provider -- to quickly capture its fair share of the pie. Because of its better feature set and quality, its market share has been rising steadily. In Q3 of 2006, its IP Relay revenue reached 3.5 million. In the previous quarter, it had a pro forma IP Relay revenue of only 2.2 million. That is a quarterly growth rate of over 59%. The net revenue grew even faster, 69% and 62% in Q2 and Q3 quarter over quarter. Boosted by recent launch of wireless relay service on Blackberry, it will continue to grab market share in a healthy clip. From 2006 Q1 to Q3, its market share grew from 5% in Q1 to 12% in Q3. It still has a lot of room to grow. The Wireless IP Relay Service is the cell phone service for hearing impaired. It will provide the big boost to the relay service usage.
i711.com domain name is a valuable asset. 711 is the TTY relay service number for many years . It is the equivalent of 911 for general public. With the emergence of the Internet, Old relay providers are no longer protected by the state contracts. A in-state IP relay call is the same as an out of state IP relay call. i711.com is on the way to consolidate the IP relay market. It may will be the dominate player (with more than 50% market share) in this market in a couple of years.
In order to estimate the earnings of next year, to be extremely conservative, Let's just assume IP Relay will grow 20% quarter over quarter.
VIDEO RELAY SERVICE (VRS)
GoAmerica is launching its VRS service next month (Dec, 2006). VRS is growing even faster than IP Relay Service with a compound annual rate of 155% (See this presentation).
VRS is also provided free. It allows deaf person to talk to an operator using sign language. The service requires trained sign language experts and thus is reimbursed at high rate of $6.644 per minute. In the Q3 of 2006, the total VRS market exceeded $76 million.
There are currently 8 players in VRS market. If GoAmerica can repeat its performance of IP Relay Service, it can easily reach 10% of the market share next year. By then the total VRS market can reach $150 million with annual growth rate of 100% (It has been growing with a 155% annual rate).
The initial signs of VRS success is good. A former AT&T VRS executive joined GOAM board recently. GoAmerica can leverage their popular i711.com web site (used by 12% of hard of hearing population) by putting a link on the home page to generate usage.
THE EPS ESTIMATE
GOAM has reached operational cash flow essentially break even this quarter. It would have been profitable in Q3 of 2006 if not for the increased marketing cost for the preparation of VRS launch. The key to this stock is its tiny shares outstanding. A mere 460K will make 0.20 EPS per quarter. I estimate they may be able to achieve this in Q4 of 2006. 0.20 EPS per quarter translates to $16 PPS.
But the big story is the Q4 of 2007. By then they may reach $4 million net. Not much money for big telecom companies, but a huge PPS boost for GOAM.
Here is the estimate at Q4 of 2007.
The IP Relay margin is currently at 33%. VRS margin is unknown. To be conservative, let's assume it is 20%. Also, we assume other business stays flat, Sales and Marketing cost doubles. The numbers are in thousands.
Subscriber Revenue ----------------- 328
Commission Revenue --------------- 559
Equipment Revenue ----------------- 165
Other ----------------------------------2
IP Relay Revenue -------------------8701
VRS Revenue ----------------------15000
-------------------------------------------
-------------------------------------24755
Subscriber Airtime cost ------------265
Equipment Cost --------------------178
Network Cost -----------------------27
Sales and Marketing --------------1400
G&A ------------------------------1105
Research ---------------------------38
Depreciation ----------------------104
Cost of IP Relay -----------------5827
Cost of VRS --------------------12000
---------------------------------------
--------------------------------20944
Net ----------------------------3811
EPS/Qtr ---------------------$1.63
PRICE TARGET 1.63 x 4 x 20 (PE) = $130
FURTHER DISCUSSIONS
People and myself has asked some questions about my analysis. I will attempt to address it with a Q&A format.
Q: How does FCC manage the Relay Service market?
A: Mandated by law, Federal Communications Commission (FCC) sets up this fund called TRS (Telecommunications Relay Service) fund. The monetary resources for the fund come from telephone bill payers in the United States.
Q: How big is the IP relay and VRS market?
A: As of Sept 30, 2006, the quarterly market size for both of them is $105 million. The growth is still on going. The growth of IP relay and VRS is well documented. see GOAMs 8K filing on Feb 27, 2006 for some details. The point is, we are not talking about next AT&T. we are talking about a tiny company becoming a small company. By becoming a small company, its share price will be sky high because of its tiny shares outstanding.
Q: What makes you think they can grow IP relay 20% a qtr?
A: They are doing better than this in the past qtrs. 2006 Q2 and Q3, their net rev. grew by 69% and 62% respectively. IP relay usage as whole has been growing. It exceeds the projections all the time. 20% is reasonable.
Q: Why do you think VRS market will be $150 million per qtr next year?
A: This is a projection based on the growth track record. The past compounding annual growth rate is 155%. FCC currently projects VRS market will be $90 million by Q2 of 2007.
Q: If it grows too big, Can FCC change the rate dramatically?
A: The growth will slow down at some point, but not until after a couple of years. The growth of IP Relay is at the expense of traditional TTY Relay. The relay service market is mandated by law. FCC has to make it work. The rate can change but it will be small changes. The rate has actually gone up some times despite the rapid growth. FCC is formulating a lasting rate formula for relay service. in the mean time, current rate stays until next July. FCC is committed to assure the quality of relay service. TRS fund has sufficient money right now. FCC will unlikely change the negatively. The money for relay service does not come from FCC. It comes from the telecommunication taxes you and I pay. However, FCC currently seeking comments on rate policy. It does show some uncertainty FCC document
Q: What if relay market stops growing?
A:Even if the market stops grow, GOAM is still fine because of its market share gains.
Q: If the potential is so big, why can't a big player step in and take all the money?
A: To a big telecom, The potential is not big enough. But it is more than enough for GOAM, a mere 10m market cap company. AT&T, MCI(now Verizon), Sprint are all in this market earlier than GOAM. But GOAM is chipping away market share fast. The big companies don't have the same focus as GOAM does. Big guys are not as nimble as GOAM. Inside those big companies, the relay team probably is smaller than GOAM's team. Those people are in a big company without much drive to succeed. Their product is not as good as GOAM's. In VRS market, It is the small guy Sorenson who has the lead for now.
Q: Will VOIP and Instant Messages affect the IP relay and VRS?
A: No. VOIP is for hearing people to communicate with each other. Instant Messages are for text exchanges. For a hard of hearing person to talk to someone on the phone, a relay service can not be avoided. Just imagine how a deaf orders dinner from a local resturant. Some have argued that IM will make relay useless. This is a false claim. Voice telephone is here to stay. How are you going to make or receive a IM while you are driving?
Q: The stock has performed poorly in the past, what do you think has changed?
A: The business has changed. GOAM only entered into IP Relay business last year. it is their main business now. In the technical point of view, The 50dma has just crossed over 200dma. It has just formed the saucer bottom. The price has acted much differently than before.
Q: There are news report about frauds in relay service. Some overseas criminals use it to order merchandise with stolen credit card numbers.
A: FCC and relay providers are aware this problem. They are taking measures to fix this. One of the measures is to check the IP address of the caller, if it is from overseas, refuse to service the call. The other measure is to require registration when a credit card transaction is involved.
The problems are part of any business. This problem will not affect the commitment and resources to make relay services work.
Q: In the calculation, Why G&A cost stays low at $1105K.
A: GOAM has a fixed cost structure. For IP Relay, They split revenue with Nordia. Nordia manages the call centers. GOAM's IP Relay revenue is a net revenue minus the network cost. So they can grow the revenue without any G&A increase. For VRS, They are partnering with VLI. The deal structure should be the same as with Nordia for IP Relay. Except for VRS, GOAM may get up to 50% of revenue split. G&A cost should be minimum. Besides, the 80% cost should account for any G&A increases if they have any.
Q: Why R&D cost stays flat.
A: The VRS R&D is mostly done. They have said in their 10Q to continue to cut it down. bring R&D work in-house. Looking ahead, they don't see any increases.
Q: $130 is too much to think. It is unrealistic.
A: I agree it is hard to think a $4 stock can grow to $130 a share. But if you forget the current stock price for a minute, just think, Can a major player in the hearing impaired telecommunications market to have a 270 million market cap? I think the answer is YES. There are 30 - 40 million hearing impaired or speech disabled people in this country. The population is more than a lot of countries. If we just play ultra conservative. Let's say they only get 5% ($7.5 million) VRS market next year, that still points to a $1 EPS per qtr. That translates to $80 PPS.
Q: $80 is still too rich.
A: Let's say their VRS is a total failure, they just do their regular job at IP relay. they keep their Sales and Marketing under 1 million. They still make .50 cents EPS per qtr. That translates to $40 PPS.
Q: $40 sounds more realistic.
A: It is low. but anyway, a 10 bagger is still rare to find.
Q: It just sounds too good to be true.
A: While $130 is the projection based on the continued momentum of IP relay growth and similar growth in VRS. We can not assume the future is a straight line. We can neither trade like it is going to $130 for sure. Any unforeseen event can happen that will damage the bull case. Without thinking about a specific price target, all the facts as of now are pointing to a higher PPS. Since this company has such a small float, a small amount of profit means big EPS. Buying stock is a speculation game. My speculation is, the worst they can do is $32. The next worst is $68. The conservative is $80. The best is $130. The odds are good for a better PPS than the current one. Even if we can not get a 20x or 10x, we can still make a good profit.
Q: Is there any risks?
A: There are risks in any investment. GOAM is a company on the verge to be profitable. Its performance in IP Relay is impressive and VRS should be a cash cow. The potential and value outweighs any risks in my view. However, one should consider the risks carefully. The biggest risk I can see is the rate change. Please see this FCC document for details
Happy Trading!
This column is for information and educational purpose only. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.
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