ModaCAD Short Case.
MODA is positioning itself as a major player in the E-Commerce industry and has signed and announced a large number of partnerships. Even after its recent dramatic decline in stock price (to a price of $13 when I composed this report), it carries an $80 million market capitalization yet had only $4.5 million in sales in 1997. They are planning the release of their Fashion Trip software in September, and should have their site fully operational in December.
Reasons to short this stock:
1) Product provides little value to end users
2) Business plan has limited upside
3) Partnerships are long on hype, and short on substance
4) Management has a poor track record
5) Management seems to run the company for their own benefit
6) The company is overvalued
1: Product provides little value to end users. Teenage girls are an important retailing market niche. They spend a significant amount of money on clothes and fashion merchandise. The problem for MODA is they are not big users of computers or frequent catalog purchasers. The E-commerce and mail order catalog customers are those who want to shop from home so they can save money and avoid the inconvenience of going to the mall. But, as a group, teenage girls like going to the mall and are not very price sensitive. The problem with MODA is they want to convince teenage girls to do something they normally don't like (spend quality time with the computer) and stop doing something they do enjoy (going to the mall with their friends). In return for this sacrifice, MODA is going to allow them to virtually try on clothing and chat on-line. MODA is trying to recreate the mall shopping experience, but why would someone choose a poor substitute when they can have the real thing. I think the teenage girls will continue to go to the real mall, and leave the cyber shopping to their parents and geeky brothers.
2: Business plan has limited upside. MODA constantly proclaims the company as an emerging leader in E-Commerce. But really, what are they selling? They create a site and get development fees for putting up a storefront for each vendor. Later, they can get revenue from advertising. In almost all cases, MODA gets no part of any potential transaction. In fact, the customer must go to the vendor's website to make a purchase. Their real business is selling the CD-ROM. In fact, you can't get "the full experience" without the CD-ROM. The web site by itself has limited functionality. So, MODA is really like a combination entertainment software developer (with one unproven product) and website developer (read low-margin commodity business). They are depending on teenage girls to run to their local computer store and buy software so they can look at clothing on-line. What are the odds?
3: Partnerships are long on hype, and short on substance. Intel does not own part of MODA. They were granted warrants as part of the development contract. That contract is now complete. Amazon has a revenue sharing agreement with MODA, but Amazon has a similar agreement with many website operators. It is part of their normal marketing strategy. The only difference is that this will be from an Amazon storefront. And all the other partnerships are payment to put content on the site. MODA does not sell their products. All purchases are made at the vendor's websites.
4: Management has a poor track record. I couldn't find any evidence of running a successful business on any of the management's biographies. At first glance, it would seem they have done a good job of running MODA in recent years as the company reported EPS of $.06 for 1997 and $.20 for 1996. But, a deeper look into the financials show that they capitalized massive amounts of software development costs. In fact, if you look at cash flow from operations and investing activities (where they record the capitalized software) you see a negative cash flow per share of $.62 for 1997 and $.88 for 1996. So, in reality, their past "profits" were an accounting illusion that hid real negative cash flow. And don't think the negative cash flow was due to growth, as they only grew revenue by $1.5 million in 1996 and $1.1 million in 1997 while capitalizing over $2 million in costs for each of those years.
5: Management seems to run the company for their own benefit. Its a family affair. Joyce Freedman is the CEO, Lee Freedman is the CFO and Linda Freedman is VP of Marketing. Maurizio Vecchione is COO and Andrea Vecchione is Secretary. Joyce Freedman is on the Compensation Committee and Lee Freedman is on the Audit Committee. And Joyce Freeman and Maurizio Vecchione were just granted new contracts with 30% raises, $100K signing bonuses and a tripling of stock options incentives. Not bad considering their old contract hadn't even expired and they have underperformed analyst estimates so far this year. And of course, management is selling shares. Recently J. Freedman and M. Vecchione each sold 10,000 shares, although they continue to have substantial holdings.
6: The company is overvalued. This isn't Yahoo or Microsoft. This is selling CD-ROMs to teenage girls and managing one website. Yet, even at the current stock price it has a market cap of $80 million, with $10 million in cash. They did $4 million in revenue last year, but are in a restart mode as most of their old revenue sources (3-D Home Interiors and the Intel contract) are gone. If this was a private venture capital deal, I could maybe see a $10 million valuation for the business (although I wouldn't fund it). Add back the cash and I get $20 million or $3-$4 per share.
Risks to shorting this stock.
Currently, there is no great catalyst for a further decline and a market rebound could make this stock look "cheap" as it is far below its highs. Analyst expectations are low for Q3 and easy to meet. In fact, there could be a spike in the stock when they get the E-Commerce site up and running. Insiders still control almost 40% of the company and the short interest is about 5 days of trading volume, so a squeeze is always possible. The company has $10 million in cash and is on a burn rate of $1 million per quarter, so bankruptcy is not likely in the foreseeable future.
I still have some shares short, but not a full position. If the stock gets back up to $20 I will aggressively short it. There are probably better places to short right now, but I wanted to put this out publicly for the benefit of the longs. This stock belongs at $3 or $4 and may very well go there if we have a protracted bear market.
Herb Greenberg's article in TheStreet.Com was the initial source of my interest in MODA and prompted me to do a full analysis. Auric Goldfinger posted the first note on MODA on the internet that I saw.
This report is only my opinion, and all investors should do their own research and not rely on what I or anyone else posts in these forums in making their investment decisions.
Regards,
Archer |
