Unfairly sold off or fairly sold off? That's the question.
Last year, I got my forecast completely wrong.
"Rough modelling forecast show that if they grow sales at 130% to 2025 without facing large competitors with a better offering, they could snap up 33% market share. The forecasted market is $6B in 2025." - last year me :D
At the time I felt very optimistic in my assumption. Now, I believe it is utterly wrong. Currently, it is reported as of 1HFY20 that 25,000 SPACETALKs have been sold. Management gave guidance for FY20 at 90,000 sales. Hence, despite "exponential growth" as stated by Mark (CEO & Chairman) they had to make up 75,000 in 2HFY20. It felt exponential as MGM Wireless sold more SPACETALKs in 1HFY20 than the entire FY19.
Unfortunately, Covid-19 hit and it derailed their sales growth. Wearables revenue went down from $6.2M in 1HFY20 to $0.62M in Q3FY20. You must be wondering why I make comments on last quarter sales. The sales drop was significant, Q3FY20 was meant to be the big quarter to drive sales especially during "back to school". The sharp drop in revenues correlate to significant loss in sales. By my estimates, they might have sold only 4,000 SPACETALKs (UK & Aus) in Q3FY20.
Putting my pessimistic hat gives another 4,000 SPACETALKs sold in Q4FY20. This number is probably wrong as lockdown restrictions eased off during May. Hence, my assumptions give 33,000 SPACTALKs sold in FY20. This is 57,000 fewer than the 90K guidance. Fortunately, during the pandemic management removed their guidance. With lower growth in 2HFY20, gives total FY20 revenues of ~ $11M. Most of the growth came in 1HFY20 with 25,000 SPACETALK sales.
Regarding the long-term forecast. A 33% market share means capturing $2B, given the average price per SPACETALK is ~ $250 would recquire MGM Wireless to sell 8 million SPACETALK devices. I honestly, do not think they can get there. Management gave guidance on the population targets. Since, the device is for kids between 5-12, their target market size is ~240K children in Aus and ~1.7 million children in UK. Thus a total market size of 2 million children. Thus, to get 8 million MGM has to penetrate a large market like USA & China. I put the 8 million target in the very highly unlikely bucket.
So, what is a reasonable estimate I am willing to make, I think 350k SPACETALK sales in 2030 is reasonable. The market share is 1.5% which is tiny but achievable. The forecast does not include assumptions on (US, China and SPACETALK Life).
So, the final question to consider would be, "did the stock deserve to be sold off?" I believe so, however the market is currently being too negative on future growth. I think there is some light in the end of this dark tunnel. 350k SPACETALK sales in 10 years, give around $90M in revenue. The market cap is $20M. This looks like a bargain.
25 May 2020. MWR enters trading halt today ahead of a significant new customer contract and capital raising. Suspect leaky ship with the stock rallying from $0.091 on 18 May 2020 to close at $0.14 on 22 May 2020, the last day of trading up over 50% in 3 days, though there was a pretty strong market rally in smallcaps.