Disclaimer: Shareinvestors is not authorised by the Financial Conduct Authority to give investment advice. Terms such as ‘Buy’, ‘Sell’ and ‘Hold’ are not recommendations to buy, sell or hold securities, these statements and other statements made by the author have the meaning only to express the author’s personal views on the quality of a security. Independent financial advice from an authorised investment professional should always be sought before making investments. CAPITAL AT RISK. Full Disclaimer here.
CloudTag is probably one of the most promoted stocks among private investors at the moment, particularly on Twitter. The company has seen a meteoric rise from the start of January 2016, rising from 2.5p to 11.75p as of writing, valuing it today at £44.2m. It is always pleasing to see private investors doing well, but should they now be thinking about selling at these levels? For pre revenue companies like Cloudtag I tend to use a screening tool and if the company passes the screening I then follow up with some analytics for good measure. This is the approach I will follow below.
Wh0 are CloudTag?
CloudTag is pre revenue United Kingdom-based company that offers CloudTag Track. “The Company’s CloudTag Track and its associated smart device application range, provides personalized, weight-loss and fitness programs based on the latest clinical-grade, wearable fitness monitoring technology.”
This is a competitive space, but does the CloudTag Track have a Unique Selling Point?
I thought long and hard about this one and actually I think the company may have a USP, based on CloudTags claims. My own experience as an Apple Watch user is that if I do gentle or moderate exercise then the watch seems to track calories and my heart rate fairly well, anything more vigorous and/or dynamic and the data is a load of codswollop. Looking at the fitbit range, they also seem to suffer from the same issue. The CloudTag allows you to get around this issue by wearing it on your wrist for casual use and chest for more vigorous exercise.
The CloudTag track also tracks activity and sleep automatically and claims to measure Heart Rate variability, this being a key measure of stress. I have to admit that these are all one ups on my apple watch. That said I can’t see any information on how the the Heart Rate Variability information is presented to the user from CloudTags website. Another concern is that the product is not yet released so we don’t know in reality how seamless the experience is. What concerns also is that I can see reviews here and here but none of them are a ‘hands on’ review, they both look like articles placed by PR people. Has the product been offered to any Tech bloggers? If so then why can’t I find any reviews? My final concern is that although I like the product does it ‘medical grade’ heart rate tracking needed for most users?
What’s the price? When is it available?
The price will be £89.99 and was originally estimated to be available in summer 2016, we don’t yet have a launch date, the last news we have was the RNS here which quotes that the distributor Second Chance are looking to build an orderbook with ‘major retailers/etailers’. The cloudtag website still gives potential retail buyers no indication when the product will be available, other than ‘coming soon’. What are the reasons for the delay here? Are their teething problems with the product or is Second Chance struggling to fill orders? The following statement from the latest RNS seems a little ominous too, is this an attempt to drip feed investors to the possibility of things not being well? Perhaps I am paranoid, but I have been trading on AIM far too long!
Good progress is being made on all fronts but it should be noted that Cloudtag is entering a highly competitive market and faces many challenges commonly associated with such entry. Plans have been put in place to address such possibilities and we are confident that our team has the skill and determination to resolve any such possibilities should they arise.
Are there any other barriers to a successful launch here?
I think the product seems pretty good if all the claims are correct and for the price it seems competitive, the Fitbit Charge is the same price and yet the CloudTag has the advantage of the heart rate accuracy and potentially heart rate variability.I popped into Dixons though earlier before writing this article and I counted 15 different wearables, there is a lot of choice out there? Is the product sufficiently able to differentiate itself without a heavy marketing campaign. This is probably my biggest concern, can CloudTag really gets its product in front of enough potential customers?
The marketing budgets of the Top 20 wearable fitness companies are included to the left which illustrates how much they spent in 2014. Fitbit spent $21m (£16m) in 2014, where is CloudTag going to find the money to compete on this level and persuade customers that it’s product is different? This to me illustrates the challenges CloudTag face.
That said, Withings is a smaller company with a good selection of products that managed to get a buy out from Nokia this year and raise its profile enough on a shoestring marketing budget of $199k. However, Withings also was one of the earlier entrants to the wearables and ‘Internet of Things’ space (I hate hate that term) giving it a very big advantage, whereas CloudTag is much later to the party.
How does the Valuation look?
Let’s look at one of the potential competitors Fitbit, who in 2o15 managed to generate cashflow from its operating activities of $109m from $1.8bn of Sales, that is just 6% of revenue! This Cash from operations was subsequently eaten up by financing fees too, this really shows how tight the margins are, or in other words how competitive the market is and what an uphill task CloudTag has in front of it.
To justify Fitbit’s CFO multiple below it needs to make sales of $1.8bn or 54% of the market capitalisation. Let’s assume for a moment that CloudTag achieves the same margins as Fitbit. This would be £21m of sales equivalent for Cloudtag against it’s £43m capitalisation which all things being equal could generate £1.26m of CFO, giving a very generous CFO/E ratio over 30. I admit these are ‘back of fag packet’ type workings, but it does illustrate the level of sales needed to generate a return here to justify CloudTags market cap. Is £21m sales per annum, i.e 0.25m units achievable by Second Chance the distributor, when so far Sales are £nil? Even if it were to generate this level of sales, with just £2m in the bank this is a very tough working capital cycle for CloudTag to manage. We could of course assume CloudTag can get better margins, but given the lack of economies of scale available to smaller companies is this really realistic?
To further compound the uphill battle, wearables is also a fast moving market sector, with pressure to keep new products coming. Even if against the odds the CloudTag product is a success, how long is the shelf life though? 2,3 maybe 5 years tops? The first couple of years post launch, even if CloudTag survives, are likely to be cash draining given some of the sunk costs needed to launch a product. Maybe by year 3 it could turn a profit and generate some cash? However, the R&D departments at some of the bigger players are vast and how long would it be before a superior product emerges from a competitor?
The other option of course to realise shareholder value is a buy out from a competitor, this is a possibility and much more likely than CloudTag being able to go alone. Let’s though return to Withings above, the acquisition was for $191m cash, i.e. £150m. The product range of Withings is larger, offering some real innovative and stylish products, winning tons of awards on the way. When you consider CloudTag is already valued at £43m, i.e. 0.3x Withings then this valuation looks very full to me. CloudTag has just one product, which is differentiated but certainly no more differentiated than any of Withings offerings in my opinion. I therefore believe there is no further upside on the CloudTag current valuation.
SELL – Target 5p
I do like the product but at this stage there is so much potential downside here which is not factored into the share price. To sum it up this is David vs Goliath and whilst the patents and/or product could be attractive to a competitor I can’t see the valuation being as high as £43m when looking at the Withings deal. My target of 5p capitalises the company at £20m or so, this could give some upside in any deal scenario, until then I won’t be getting in here.
I fully expect to get trolled on Social Media and the bulletin board for this article but i’ve got thick skin so bring it on, constructive comments preferred of course…
Disclaimer – I have no positions in this stock and to my knowledge nor do any close family, friends nor associates. This post is purely my opinion and should not be taken as financial advice. I welcome any alternative comments and will consider adjusting posts based on information made available to me.