Ben Graham taught me that its better to invest in good businesses trading at discounts to intrinsic value. Warren Buffett elaborated on that idea and taught me it’s sometimes okay to invest in great businesses at okay prices. What both of these men will tell you is that it’s always a great idea to invest in companies that have an excellent commander at the helm. In an effort to remain completely transparent with my readers, the last motto for investment is something that is only a recent dedication.
At my core I’m a deep value investor, who believes sheer outrageous value is always enough. However, cornering myself into this box would have me miss out on tremendously valuable investment opportunities. I’m not saying that every great business leader leads their shareholders to Valhalla, but what I am stressing is that management matters, and it matters more than I originally thought. It’s something I’m working on becoming better at analyzing. Luckily for me the list of what I need to improve on as a stock picker never ceases to get shorter, merely appended and footnoted. Anyways, let’s get to the company, shall we?
A Titan of Industry
Walker Innovation trades under the ticker WLKR. If you try to look for analysis on the company, you’ll be hard-pressed to find any. The company is barely on the radar for those in the financial markets, so naturally it peaked my interest. As a business, WLKR describes themselves as:
[The company] owns and seeks to commercialize, license and enforce the unique portfolio of intellectual property developed by inventor and entrepreneur Jay Walker, who serves as the Company’s Executive Chairman. The Company has a history of performing innovation services that help companies improve their internal product and business development efforts.
Jay Walker is the majority stakeholder and Executive Chairman of Walker Innovation (WLKR). If you don’t know Jay Walker, I’ll provide a quick synopsis of his accomplishments, but a quick Google search will shed light into the man’s brilliance. Walker was the CEO and Founder of Priceline.com, is in the top 10 of Most Patented Individuals, and made the top 50 of Time Magazine’s “Most Influential Business Leaders in the Digital Age”. The man has street creds, no doubt. Walker tries to solve what he calls, “problems located at the intersection of human behavior and large-scale digital networks”, and he’s been doing this since 1994. According to Walker Innovation’s website, the goal of the company is to, “focus on behavior and network thinking allowed them to address problems that are fundamentally multi-industry, something that makes the Walker Digital portfolio of inventions unique.” With Jay Walker at the helm, it makes me more confident in the business’ ability to capitalize and monetize its goals.
Before going any further, I feel as though I should put a disclaimer out there: This company is a true-blood net-net investment. The company trades at a roughly 60% discount to its net cash on its books, has no debt, and trades at 0.44x book value, an extreme discount compared to its peer average of 5.4x book value. However, unlike most net-nets, the company actually has prospects and a history of generating money and returns for their shareholders. Sometimes you gotta just keep flipping over rocks! And although sometimes I belong to the camp that sheer outrageous value is enough to purchase a company, I find myself more decisive in an investment decision after looking at the entire picture, not merely the accounting metrics.
How WLKR Makes Money
The company generates its revenues from the granting of intellectual property rights for the use of, or pertaining to, its patented technologies. Also, WLKR may monetize its intellectual property through the sale and/or licensing of select patent assets. The company stresses that Patent Protection is a key part of the company’s business model, because it provides them with a period of exclusive ownership, during which the company has an opportunity to recoup risk capital and generate profit from inventions.
Remember from earlier the company’s business model is to create intellectual property with the goal of solving business problems, and with the intent to one day achieve commercial status. Because of this, the company runs into litigation troubles and lawsuits for various patent infringements. This has prompted the company to add another segment to their business, Patent Enforcement and Licensing. This segment is no joke either for the company, it brought in $3.6MM in revenues since 2015 alone.
Currently the company possesses 185 U.S. issued patents and another 8 pending approval. These patents range in application from e-commerce to financial services to entertainment and video gaming, even entering the online education space, as well as security and state lotteries.
What Is The Market?
WLKR released a great slide deck on their addressable market within the patents business, which you can find here. For their target market 1, the company identified 90,000 businesses, in target market 1A they identified 140,000 businesses, bringing the total initial addressable market to 230,000 potential business subscribers. When taking an average annual subscription fee for U.S. Patent Utility of $14,400 you generate an addressable market worth nearly $3.3B per year.
This is where WLKR comes in with their patent business ready and able. They provide a three – pronged service for businesses that include No Fault Patent Licensing, Financial and Legal Services, as well as Information Services to address the growing needs of businesses to get patents from pending to approved to innovate and expand their business and provide a competitive advantage.
Searching the Annual Report ($ in Thousands)
From a balance sheet perspective, the company is positioned extremely well. After cashing in their Warrants for their investment in the company Upside, the company currently sits on $24,139 in total assets; $24,041 of which is straight cash. During that same time, the company was able to decrease its total liabilities from $991 to $350 by reducing their Accounts Payable as well as reducing overall Accrued Expenses.
The red flags don’t really start until you hit the Cash Flow statement. After bringing in total revenues of $4,278 in 2016, the company only recognized $300 in 2017, coming from their licensing fees. A huge chunk of the previous years’ revenue ($2,561) came from what the company refers to as ‘Custom Innovation – Related Party’. The company recognized $0 in revenue costs for 2017. Operating expenses declined around $4,000 due to heavy decreases in legal and consulting fees, as well as no expenses for restructuring. Overall, the company actually moved in the positive direction in terms of cash flow from operations, sustaining a loss of $3,145 in 2017 compared to $5,271 in 2016.
The company’s net income numbers for 2017 look awful compared to its 2016 numbers, but when you look at the statements, its easy to see why. For 2016, the company recognized a whopping $14,103 in ‘Unrealized gain on investment’, which of course was their Upside Business Warrants they purchased. This could be something to consider going forward when looking to evaluate the business. Since the nature of this business isn’t as clear-cut and predictable as say other service business, it makes the job of valuing the company on a quarter to quarter, year to year basis difficult. Averages must be established. Since 2013, the company has managed to reduce its net income loss from -$14,369 to where it stands currently at -$891. This is if you take out the two years where it was profitable.
When it comes to the company’s income statement, a lot of their bottom line seems to stem from unrealized gain / loss on investments, which makes sense when you think about the type of business it is. One should not be naive to the inherent risk this poses.
Trends to Follow
Since 2012, the company averages quarterly EPS of -0.138, with peaks of $0.21 in 2016 Q2, and lowest in 2013 Q3 of -0.76. The current trend seems to have more downward pressure, but with a business like this, it is hard to make a good estimate on potential earnings numbers.
Another important trend is the decrease in losses the company is suffering in Operating Income. After its max trough of -$7MM, the company now reports an Operating Income loss of a mere $337,000. The company is also back to its historical high cash and cash equivalent values of $24MM.
Revenues are trending upwards but it is hard to predict a forecast of revenues going forwards due to the heavy reliance on gains from investments.
The company has 16.40% insider ownership, a mere 0.04% Institutional Ownership, and a Float Percentage of 88.18%. I love the fact that only 0.04% of Institutions hold this position. The only institution holding is Murphy Capital Managment, LLC, which owns 1.33% of the total shares outstanding. Insider ownership has steadily grown larger after falling to 6.51% in 2009.
Compensation expenses for 2017 amounted to $7MM, or 3.34% of total operating expenses. The company is small, mind you, a total of 4 employees. Employee Option Awards decreased close to $1,000 compared to 2016, with 2017 coming in at $343. Total compensation expense amounted to $344 (this is before you net out services charged to Walter Digital Media).
What’s the Pitch?
The catalyst for the company is it’s sheer outrageous value coupled with the titan Jay Walker at the helm of the company. It’s not every day you get a net-net with a tremendous business leader like Walker, so when one comes along, its important to take a harder look at it. Although the company is extremely hard to value given its volatile earnings and revenues, the underlying facts of reduction in costs of operations, and a steady decline in Operating Income losses dictate a turnaround is in place. It also doesn’t hurt that the company is sitting on $24MM of liquid cash, making them extremely flexible in their choice of action going forward.
I would like to see them focus on growing their revenues and making them more consistent, perhaps investing that capital into a sustainable, boring business. I trust management to do its job for the forseeable future, and if they act on their plan to acquire through merger or purchasing of additional operational businesses that provide revenues and growth to the bottom line, this stock could be in dollar territory, heck at least trading at its cash value.
Price action is forming a symmetrical right triangle on the weekly charts, with heavy resistance at the $0.60 price level. Once price breaks through that resistance I would begin to buy in, risking no more than 100bps open risk on the trade. I would place my stop-loss underneath the triangle at $0.35.
Where could I be wrong? The company could start burning through cash at a much faster rate than it currently is. Secondly, Jay Walker could up and leave the business and forget about WLKR. Thirdly, the company could fail to sell their business and have competitors eat away at their bottom line. Fourthly, the company could fail to achieve unrealized and realized gains from various investments. Finally, the company could reverse trend and start increasing the amount of operating expenses while simultaneously bring in less in revenues.
Some of these are more probable than the others, but all of them pose severe risk to my bullish thesis.
At the end of the day, sheer outrageous value might be enough for this company. Think of this as a long call option on the mind of Jay Walker.