Phunware (PHUN) is among a group of stocks that have benefited from the hype surrounding Donald Trump’s soon-to-be-released social media platform. In addition to Digital World Acquisition (DWAC) itself, this also includes Rumble (CFVI). While the partnership with Rumble is certain, it is only rumored with Phunware so far. Nevertheless, the stock is 140% higher than it was in September, making the valuation much more expensive. Given the difficult market environment with rising interest rates, the unprofitability, and falling sales for years, I think a short position is appropriate. But there are risks and things to consider, more on that later.
Short business overview
Founded in 2009, Phunware is based in Austin, Texas, and has only 58 employees. If you have landed on this page, you probably know what Phunware does. If not, I recommend checking out their website. There is also a short video on the home page explaining the business. Summarized in one sentence, Phunware offers companies products and services to engage, manage and monetize their mobile application audience.
The former connection to Trump
The company supported Trump’s 2020 campaign and developed an app that allowed Trump’s team to interact directly with users. Perhaps one could say it was a precursor to the company’s own soon-to-be-released social media platform.
Because of this connection, the stock rose at the end of October 2021 from $1 to more than $8 at its peak and has since fallen back to $2.38. This means that the share is still almost 140% higher than the market attributed value to it in September. And this is even though there has been no firm announcement about a collaboration.
The partnership becomes increasingly unlikely
With each additional day without an announcement of a partnership, I believe the probability decreases. The collaboration with Rumble was already announced on December 14. In addition, DWAC’s first applications are scheduled for release in the first quarter of 2022. If there is a collaboration behind the scenes, why is this not published? All that happened in the election campaign was that Phunware developed an app. But this was at a time when DWAC existed at most in the back of Trump’s mind. Now it could also be that DWAC develops its own apps, payment systems, and subscription models. And even if there is cooperation, it is pure speculation what it will look like. It may only be a one-time order that brings in one-time revenue. It is not said that Phunware would receive recurring revenue from the partnership. As I said: There are many speculations, but no facts.
Apart from that, what about the business so far?
Phunware has been suffering from falling sales for years. In 2016, the revenue was $47M, and in 2021, it is expected to be only around $10M. This is all the more astonishing since this is exactly the time when a pandemic boost should be possible with this business model. Many other companies had strongly increased sales in 2020 and 2021, which is a red flag and an indication that something is fundamentally wrong in the company. Whether it’s the products themselves, the marketing, or something else I can’t judge, but the numbers speak for themselves.
Losses and cash
In addition, the company is making losses and has underperformed analysts’ estimates in recent quarters. Therefore, the TTM EV/S ratio is currently over 30 (enterprise value is $231 million). For the near future, estimates are that sales will increase to $30M by 2023, so a small turnaround is coming (if these estimates come true). But this will not bring the company into the profit zone and even then the valuation would still be too high at the moment.
The last quarter of 2021 is still missing, but the estimates assume -$0.32 EPS for the full year. The company currently has 96M shares outstanding, resulting in a full-year loss of 96M * -$0.32 = -$30.72M. This correlates quite well with the stated net loss for the first nine months of 2021 of -$21.7M.
At the same time, however, the company has cash of only $882K, making new financing necessary soon. In recent years, the share count has already increased sharply: From 27M at the end of 2018 to 96M now, and this trend will have to continue given the financial position, which will put further pressure on the share price.
Insider sales or purchases?
Another thing I always look at, especially with stocks that may be candidates for a short, is insider sales. Those do exist, although not to a dramatic extent. However, it should be noted that these are direct sales and not the exercise of options. It is well worth monitoring selling by insiders regularly, especially if you choose to go short.
A short sale strategy
For all of these reasons mentioned, I believe the stock is a good short. We are seeing in the broad market right now how highly valued growth stocks are under a lot of pressure, especially those that are not yet making profits. Inflation reduces the value of future profits and when interest rates rise, investors tend to go into value stocks.
However, there are of course risks to a short position. Despite all my arguments, there still could be cooperation with DWAC that could lead to a real turnaround in the business. Therefore, I recommend a short position, with a fairly tight stop loss. I think 10% would be appropriate here. This way, the maximum loss would be 10%, but the potential for gains (i.e. stock price losses) would be much higher in my view. This results in an attractive risk-reward ratio. This rather tight stop loss is there to avoid sudden price jumps should a partnership announcement be made.