Momentum Investing

How does momentum work in investment returns? Mojo. Moment. Your groove.

You invested in ImNotHere.com--a software company that completely anonymizes your presence anywhere on the grid. That is, anywhere and everywhere Big Brother thinks you are--via mobile phone or email or chat-bot thingies. It makes you anonymous. You pay cash up front at a 7/11 to buy this thing, and poof. You’re gone.

The company had 50 million in revenues and 20 million in expenses, as word of mouth did all its marketing for it. So it had 30 mil pre-tax and 20 mil after tax in earnings, and traded at 20 times earnings for a 400 million dollar valuation at its IPO. But then, suddenly, it got sued by the U.S. And by Chinese governments, to disclose the whereabouts of Carmen Sandiego. Yeah, you knew she couldn’t hide forever.

But the company declined to open its server, and big fuss ensued. Lawyer bills were big, but the press for the company was free and fantastic and far-reaching.

So the next quarter, when the company was supposed to print 18 cents a share in earnings, it actually printed 23 cents--and you note that, on its balance sheet, its deferred revenues line ballooned from $17 million to $43 million, meaning that a ton of new sign-ups came to the company seeking to anonymize themselves.

So now…what do you do as an investor? The stock had been trading around 20 bucks a share with 20 million shares outstanding. But now it’s 32 bucks a share the first print after the quarter is announced, and you’re thinking “Dayum...I missed it.” But...have you?

This “missed it” resignation is an extremely common mistake among new and or non-professional investors. They don’t look at the underlying fundamentals and the earnings momentum behind the stock. So…a pro would ask a few questions:

Like: Is the market saturated? The price to anonymize yourself is $100 a year. So with, say, 50 million in trailing revenues, that would mean that 500,000 people have signed up to anonymize themselves.

You think the world market is something closer to 100 million people who’d anonymize, and then maybe pay a hundred bucks. That’s a world market of like 10 billion dollars, and if ImNotHere.com owned say, 30% of that market, they’d be 3 billion in revenues and enormous profits. So it’s not like they’ve dominated early a small market.

Ok next question: How good is this business? Well, to run it, it’s almost entirely about automating a software process that works with phone companies and cable companies and anyone else who provides internet access to the masses…along with a small army of lawyers who send cease and desist letters to websites, and a few other masking app things that the company updates every now and then.

In return for that identity masking of IP address and phone trails, the company collects a hundred bucks. Their marginal additional cost on that hundred? Very little. Maybe a few bucks? The 500,001th customer costs the company very little additional.

And they collect a year’s anonymizing cash up front.

And most people who buy one year, buy a 2nd and 3rd and 4th. The moment they don't continue to spend, they lose their anonymity, and ImNotHere.com is actually evil enough that they put out a mini press release on everyone who has de-anonymized with them, so that they are, well, highly incentivized to continue renewing for 100 bucks a year.

So then you return to the earnings momentum story. The company just printed 23 cents a share in fully taxed earnings--it was a big earnings beat, with big things clearly going on with its balance sheet. The stock is at 32 bucks a share now with 20 million shares outstanding...giving it a valuation of just over 600 mil.

And anonymizing is fast becoming a Thing in America and around the world. And ImNotHere is ideally poised to take advantage of that megatrend. Could the company have a million subscribers paying 100 bucks a year this coming year? Worldwide? Absolutely. Could it have 2 million? 3 million? 4 million? Easily.

So, suppose it had 2 million - and this is a total guesses, because you have little window into their world, other than to note that tons of partners are voluntarily linking to their website now, presumably getting commissions for the sale of that $100 anonymizing year and you can track that number if you spend the time….

So if it had 2 million paying $100 a year, the company would be printing $200 million in revenues, likely with only marginally more costs than the 20 million in operating costs, and then add taxes so maybe it has 50 million in opex to be taxed on $150 million of operating profits to the tune of, say, 40 million to then have 110 million in earnings?

Is that a reasonable estimate? Sure. Given the huge amount of press and chaos going on all over the world with governments terrified of anonymized citizens, and citizens loving the freedom of being anonymous…sure. The 2 million feels easily doable this year. And if they do these numbers, well then on 20 million shares outstanding with 110 million in earnings, they’d be printing something closer to 5 bucks and change a share just in earnings.

Fully taxed, unlevered earnings. And in the process, they will have generated well over 100 million in cash for their balance sheet. And with this kind of spectacular growth, the company should trade at vastly higher than 20 times earnings, more like 30, 40, 50 or maybe more like 80 times.

But even if you picked 50 times that $5 number, and you just ignore the fat cash stash being generated on the balance sheet, you get a price target of something more like $250 a share…in just a year. With the stock trading at 32 bucks a share now, why isn’t this a screaming momentum stock buy? Well, lots of nervous nellies will worry about the government stepping in to regulate the company.

But can they? Is it even possible to de-anonymize? The company claims that it expunges all of its data, and while it may be possible, de-anonymizing would certainly take a lot of time and you can bet that the engineers working for ImNotHere are like 300 SAT points smarter than the engineers working for government regulators...so it’d take the G-men in gray suits a very very long time to do harm.

Because yeah…Big Brother is watching. The trick is to pull the wool over his eyes...