There’s no sugarcoating it –since hitting all time highs in late February the major U.S. stock indexes have shed about 30% of their value in the past month. The quickest move to bear territory in history, leaving many investors reeling, with escalating global fears of COVID-19 as the main driver and automated trading algorithms fueling dramatic one day market swings.
Why is there much more light at the end of the tunnel and opportunity to take advantage building positions in fundamentally strong companies? This is because every single bear market and stock market correction has eventually been erased by an eventual bull market rally. And the current conditions presented by COVID-19 will also inevitable pass.
So Why is Now the Time For Surge (OTCQB: SURG)
Surge is a diversified holding company with multiple revenue streams. They provide a distribution pipeline to independently owned convenience stores and corner markets which is complemented by direct to consumer products targeting the 100 million prepaid wireless users and over 68 million unbanked and underbanked consumers in the U.S. These markets typically increase and perform better in difficult economic conditions.
March 18th, Brian Cox, Chairman and CEO of Surge Holdings, commented,
“We achieved another month of record revenue within our Surge Logics subsidiary. Specifically, we achieved unaudited gross revenue of approximately $1.35 million in February 2020, which represents more than a five-fold increase in sales compared to the same period last year, and more than 20% sequential growth versus January 2020. Overall, we have built a highly scalable foundation to sustain long-term growth within Surge Logics, which we believe will positively impact both our Company-wide revenue and cash flow. At the same time, we continue to execute on key milestones across each of our subsidiaries and look forward to providing further updates in the near-term.”
Further, with traditional supply chains being disrupted Surge realizes an opportunity to increase their network of retailers seeking alternative supply sources. Since Surge is a technology solution they are more agile then traditional brick and mortar operations and have no risk associated with holding inventory. The SurgePays™ marketplace is a distribution pipeline that is completely product agnostic, where Surge can react to deliver new trending products rapidly, whether that’s the hottest new Keto nutraceutical, CBD energy mint, face masks or hand sanitizer.
Most notable is the strength of recent fundamentals indicates that Surge Holdings has hit an inflection point and is poised for substantial growth over coming months with long-term growth provided the company continues to execute. Historically, Surge market capitalization has been 2.8x top line revenue. With an increase to $70M top line revenue, even a 2x valuation would indicate $1.35 per share.
Running a regression on volume(X)PRS, we can see that resistance point 1 was broken last week. This is significant because the volume transformed the analysis as it was 75% increased buying vs selling during the dramatic increase in trading volume before the trend break (March 17, 2020). In short, this signifies that a market wide factor cause the drop in the trailing 2 trading sessions, with minimum Delta% returning to previous trading range.
Important to Note: If the resistance point of $0.25 breaks, and if volume keeps consistent, we should see a climb to the main $0.40 to $0.50 resistance point.
- Surge Completes Acquisition of ECS Network adding $48.7 million in top line revenue and 9800 new retail locations bringing top line revenue to $68.3 million on an annualized basis.
- Surge wholly owned subsidiary Surge Logic announced January 2020 revenues of over $1.0 million per month, double from September and nearly 10X from January 2019.
- Analyst Report projects over 300% Increase in 2020 revenues to over $109M, increasing upside share price target to $3.45. https://www.goldmanresearch.com/202003101272/Opportunity-Research/surg-raising-forecasts-and-price-target.html
- Surge pays off Convertible Note prior to any conversion indicating improved cash flows.
- Many factors not priced properly into shares: Current increase in revs, forecasted $50M wireless revs from new best in class, $30 Unlimited Plan, Deloitte Fast 500 ranking, compounding exponential growth with expanded retail network and additional products and to SurgePays™ Network.
- Expect sharp horizontal and vertical top-line revenue growth as Surge grows their network and sales per location with additional cross sell opportunities
Prior to the recent market corrections, we saw SURG as special case: a remarkable situation in which the company has already definitively and possibly irrevocably set in motion the terms for revolutionary growth and success, but the market had yet to reprice the stock proportionately. It is rare that we find companies with a 300% increase in revenue and no corresponding increase in share price. For most of 2019 Surge historically traded in the $.50 per share range. With 103.3 million shares outstanding this indicates a $51.65 market capitalization. With reported top line revenues of approximately $18 million this is a 2.8x factor. With current revenue extrapolated at over $70 million with the ECS acquisition ($48.7 million) and increase in Surge Logics ($6.0 million); a 2x factor would indicate a current $140 million value in market capitalization or $1.35 share price today. This compounded with expected near term growth, recent positive news cycle and execution by management are the foundation indicators for what we see as the current value opportunity.
In short, SURG is a value long term growth play with improving fundamentals that have been underappreciated by the market because its recent past has been dominated by scaling infrastructure and intensive capital needs. The announcement by the CEO that this cycle is completed and the company’s recent financial data suggests the company has entered a new growth cycle, and we are seeing the company transition into a new stage of cash-flow positive growth that should translate into a revaluation of its equity.
This is supported by a combination of strong current and coming performance of its Surge Logics segment, dramatic growth in its legacy Surge wireless business, and continued development of its next-generation SurgePays Network, which is the real disruptive story here.
Coming to a Head
The most explosive factor in the SURG story is the imminent growth potential. According to SURG filings, and from extrapolatable data, we are likely to see continued and accelerating top-line growth from organic and M&A activity that could reach nearly 5,000% on an annualized basis this year across a two-year period. In fact the company already qualified for the prestigious Deloitte Fast Technology 500 list of the fastest growing technology companies in the US.
Looking ahead, that growth sprint is likely to accelerate dramatically as the company fully integrates and exploits its recent acquisition of the ECS Prepaid Network, adding over $48.7 million is sales across 9,800 retail locations with significant cross-sell opportunities for other Surge products and services as the prepaid mobile opportunity is graduated into the SurgePays regional supply chain solution.
The Big Picture
The most important point to make for Surge right now is that the big picture model for the company is no longer abstract and theoretical. The strategy is in place and already starting to pay off. The fact that the market hasn’t noticed it yet should simply speak to the opportunity now present for new investment allocations to the company’s equity.
Much of this thesis springs from the company’s recent ECS acquisition, while the $48.7 million of top line revenue was a simplistic, base-case outcome, the real meat on the bone here is about the expansion in the network for its SurgePays model, with an additional 9,800 new locations – that’s 9,800 new marketplaces that can be exploited and expanded through the precise type of execution that this management team excels at. This was the critical mass needed to take the network to an economy of scale to fully execute.
The company built a broad infrastructure in 2019 to take advantage of this moment. And the network expansion provides a massive influx of market data: Surge sees all the data from other wireless providers at these locations over 600,000 transaction per month. Hence, the precise design of its new $30 wireless offering was likely a best-fit strategy culled from that data for establishing dominance in that market.
Another notable fact is that the company added a new national sales direction just days after announcing that plan. Folks with those qualifications don’t step into a role like that unless they can see the prepotency.
That prepotency will potentially drive massive growth in the company’s mobile segment, which then folds seamlessly into its wider SurgePays distribution pipeline model.
One should note statements from the company’s CEO: look for over $50 million in new Surge Wireless sales. That would be a game-changer. And the stock isn’t priced for such a shift. But a quick glance at the numbers shows how remarkably executable this may be for the company to achieve: $50 million in annualized sales from new mobile customers boils down to just over $4 million/month. With its new $30/month plan, the company will need 140K new Surge Wireless contracts, or about 12,000 contracts per month. ECS is doing over 20K transactions every single day, or over 600K/month. If the company nabs just 2% of that, or nets 1.2 sales per store per month, Surge sees that $50 million hit the top-line with a year. Remember Surge has a competitive advantage owning their payment rails, so they pay higher commissions to the store owner, their profit partner, then other carriers. If the store owner convers someone form another carrier when they come in to pay their cell plan, the store owner makes more money.
What is the SurgePays Marketplace?
Surge Holdings operates the SurgePays™ Marketplace, a product sales channel that disrupts the traditional c-store supply chain model by providing independent and local retailers direct access to regional manufacturers from around the country. Surge leverages its wholly owned subsidiaries (value driven prepaid wireless and fintech products) to build relationships with convenience stores, bodegas, tiendas and community markets that serve the underbanked and unbanked – approximately 35% of the US population.
Once a store is onboarded to the SurgePays™ Marketplace, a trusted profit partnership is established and Surge upsells other consumable goods by connecting manufacturers directly to these retail stores.
The SurgePays™ Marketplace provides manufacturers measurable cost savings and offers an efficient platform to access independent retailers to sell products nationwide with improved payment terms
The prepaid wireless and financial services are the profitable “door-opener” to build and add locations to the Surge Network and then Surge offers additional value add products through the SurgePay™ Marketplace to grow sales per store revenue. Where store owners can order a variety of products through Surge with Alibaba or Amazon simplicity and convenience. Bringing digital efficiency with fintech services to a distribution model that has not significantly changed in decades.
The CEO has published his vision in detail: “My strategy for business building over the last 18 years has been based on recurring revenue from providing life-enhancing technology products for the underbanked with a focus on “Relationships.” During this time period, the market has grown to over 100 million prepaid wireless users in the USA with approximately 35% of the country now falling into the underbanked category. This is the last digital frontier and Surge is positioned for the land grab.” Think 100 million prepaid wireless customers overlapping with 68 million in the US underbanked as a start of the addressable market
The CEO continues, “My personal goal is to have 100,000 convenience store locations in our SurgePays network with each store processing an average of $1,500 – $2,500 a month by 2021. We will also explore M&A strategies to own more brands we can input into our distribution channel.”
- Surge shares have a fundamental intrinsic value that is not currently recognized in its share price providing a value opportunity in a bear market.
- SURG shares have been underappreciated because the story is unconventional, and capital constraints given investment in infrastructure, this enhances potential upside as indicated by the revised Goldman Small Cap Research share price target of $3.45.
- Management has been stamping down on the gas pedal over the past several quarters, ramping core business and M&A, with growth accelerating rapidly. Strong news cycle of milestone achievements.
- The company’s recent acquisition of ECS will add 9,800 stores to the Surge Network and allow for compounding vertical and horizontal expansion – something the market may be missing.
- The December 31, 2019 10-K should be published by end of March, reflecting the significant increase in top-line revenue in audited financials.
- Surge Logics new Intake Logistics created a nearly 10x Increase in revenues for Surge Logics since January 2019.
- The Company has completed its development cycle and is aggressively ramping revenues from both internal growth and strategic acquisitions increasing top line revenue form $15.2 million in 2018 to now over $70 million annualized with recent ECS acquisition and Surge Logic performance.
- Recently named by Deloitte Fast 500 Technology 2019 list as one of the fastest 500 growing technology companies.
- 2020 poised for horizontal growth as they further increase their independent retail store network and vertical growth increasing sales per store. Key Product Indicators to track in 2020.
While there are plenty of questions still in place for both the market and Surge Holdings – we see Surge as an opportunity that the broad market is missing. We are very happy with the consistent increase in fundamental top line revenues within all divisions and some recent markers of strong execution, particularly in terms of an expanding the retail network footprint as well as recently accelerating topline performance. With shares trading below the levels established in September of 2019 and the dramatic increase in revenues it seems only a matter of time for the eventual move back to the 2019 highs and possible correct to a 2x top line revenue value. Again we believe the next 10-K filing will go a long way in narrowing this gap.
Given the strong fundamental We suspect that the hurdle of “unfamiliarity” that seems to be weighing on shares in the face of recent growth will subside over time if the company continues on its current path in proving its model.