It isn’t unusual for tech stocks to trade at a very large premium to the actual fundamentals in the early days as value is largely based upon the growth potential, but at some point they have to start showing that they are going to be able to justify the valuation being placed upon them. That would seem to be the case with EVR Holdings (EVRH) now that it has launched Melody VR – which allows users to enjoy VR – given that it is still trading on a market cap of more than £92 million, even after a significant pullback in share price in recent months from the highs of over 19p which were reached back in May.
It is still very early days as Melody VR was only launched on May 2, and the company is still adding further partnerships for live streaming of events, as well as its large library of music, consisting of more than 650 international artists. Investors have now seen a snapshot though of the early progress that the company has made in terms of the monetisation of its app – which is available on the Oculus Go and Samsung Gear devices – and the share price reaction would suggest that the market is less than impressed with the figures so far. The company has just released its results for the six month period up until the end of June, so these included two months of trading since the release of Melody VR. Those results showed revenue of just £6,831 for the period as compared to a cost of sales of more than £225,000, and when you take into account the very high admin expenses of £4.18 million, that resulted in a net loss of nearly £4.4 million.
The trading period since the launch of the product isn’t long enough to really gauge how well it is likely to do and the company is focussed on raising awareness of its product and growing the user base over the next 12 months and beyond, but I find it hard to see how it is going to monitise the product to such an extent any time soon that it is actually breaking even, let alone making a profit. It is all very well announcing partnerships with large players such as Warner, but the company needs to show that will also translate into profitability. What is also interesting when looking at the accounts is that the net assets of the company are largely attributable to the cash that it has on its books, which stood at just over £26 million compared to a net asset value of £28.3 million. So, it would appear that the actual assets relating to Melody VR itself are only valued at around £2.3 million currently.
It is great having plenty of cash in the bank, but the company is already burning through significant amounts, and if it ramps up its marketing further that is likely to increase going forward. In my opinion this means that it will have to start showing some sort of return for that level of expenditure quickly. In terms of its assets aside from cash in the bank, it has roughly £1.75 million in intangibles, but over £600,000 of that is in goodwill, with a further £631,000 in development costs. It also has £1.045 million in property, plant and equipment, yet during the six month period the cash flow statement shows that it actually spent nearly £1.8 million on the purchase of property, plant and equipment. The company did manage to raise £20 million before costs at 16p back in May – although it was originally targeting £25 million – and a lot of investors took a lot of confidence from that, despite executive chairman Anthony Matchett and CEO Steven Hancock each selling a significant amount of shares at the same price at that time. The placing represented 9.7% of the enlarged share capital at the time and I must admit that I am a little suspicious of exactly what went on around the placing, given the price drop since then – although there wouldn’t have really been much opportunity to flip those shares for a profit given the price action and volume around that time.
I wouldn’t necessarily be rushing to short the company at the current price of 6.85p to sell, as it is a favourite with private investors, but based on the facts as they stand currently I certainly wouldn’t view it as a buy and that would remain unchanged until such time as the company shows a clearer route to monitisation and getting anywhere near to a profit which would justify the racy valuation that it currently enjoys.
Filed under: EVR Holdings, EVRH, David Lenigas, Sosandar, Kingspan, Tungsten Corp, Malcolm Stacey
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