FingerMotion Inc. (NASDAQ: FNGR) is a mobile data technology company that’s been on a roll. The stock chart tells the tale. The question on some investor’s minds is whether or not the fundamentals support the valuation. The fundamental value story was the focus of the latest Seeking Alpha hatchet job by a writer who has popped up on the scene early this year as a short specialist with 14 articles to his credit so far. His analysis delves into the seldom read risk disclosures in the latest quarterly report to make the case for his Sell rating. He made the inconceivable and preposterous case that FNGR might actually get kicked out of China. This article will explain the real facts and smother any notion that FNGR is a regulatory target of Chinese regulators.
The key reason this poorly followed Seeking Alpha analyst rates FNGR a sell is due to the political risks These risks are literally made up and have nothing to do with the existing or fundamental business. The risks mentioned in the annual disclosures are real and pertain to the future business, but as the CEO said in a recent podcast interview.
“If there were any country risks in China we are aware of them and addressing them – taking care of them early so it doesn’t become a heightened risk.” – Martin Shen CEO of FingerMotion
This author also stated it is his opinion that they have “no clear path to profitability” even though the company was projecting it by the end of this calendar year in the latest podcast. He also cited a lack of “expense and cash control” issues without explaining to the reader that as a TopUp merchant processor for the top Chinese telecoms they take a sliver of tens of millions of transactions. FNGR’s leading product is TopUp and it’s not even mentioned once in his hit piece which demonstrates his complete lack of understanding of the business model.
Chinese Crackdowns Exaggerated
The SA Author talks about Chinese crackdowns that started about 3 years ago and for the most part have achieved their objectives of Chinese national security. He cites a newly announced espionage law framework for intelligence gathering as a “significant, fundamental risk to the ongoing operations of FingerMotion.” Any investor’s paying attention to this analysis should realize the incredible stretch he is making of how a payment processors phone or data usage is a matter of national security. Once again, the SA author demonstrates his incompetent analysis by not understanding that FingerMotion’s core operating business responsible for almost a complete majority of revenue is for payment processing and has nothing to do with the Sapeientus Big Data business which is in its gestational period. There is no political risk that FingerMotion is in the sights of the Chinese government, but if there was even a hint of politics, the author didn’t get the memo that relations were thawing with China and that big Chinese companies like Alibaba (BABA) and Bidu (BIDU) are compliant with their NASDAQ listing requirement that open the company’s books to audit. FingerMotion is in full compliance as well. If there is still doubt regarding transparency investors should know that Dentons an internationally renown lawfirm that helps manage the Chinese regulatory review and risks as they pertain to company operations. The company also uses McMillian LLP as their US lawyers.
The Fundamental Story
FingerMotion’s fundamental story is about to be rewritten. Right now, FNGR has a core TopUp and SMS business but as the company mentioned in that last earnings release retailers are hesitant to use SMS to drive retail traffic due to a change in behavior during the COVID lockdowns. They are monetizing a base of 1.6 billion subscribers. This is why close to all the revenue in the last quarterly report was TopUp, but this may soon change in the coming quarters as the company guided that the device protection could eclipse the TopUp business and lead to a significant margin expansion.
Without the significant upside revenue that the device protection insurance business offers, FNGR still did 150% YoY comparisons. The margin contraction the SA author cited was due to the switch from SMS to almost all TopUp business which is a testament to the flexibility that management. The SA author simply looked at the numbers and failed to read the Management Discussion and Analysis section. That failure to read led him to conclude that management was “not driving margin or effectively managing costs.” The SA author used that same logic to criticize the cash flow. He also analyzes the changes in receivables which are for the most part meaningless in FingerMotion’s business model because there are no bad accounts in the payment processing business.
Balance Sheet Strengthened – Signals End of Dilution
The SA Author notes the balance sheet was deteriorating and was not “giving any indication that they have the financials under control.” A quote from the company earnings release said “the Company has significantly improved its balance sheet and exceeded the quarterly milestone of over $10 million in revenue for the quarter.” The facts show the company eliminated $4.0 million worth of LIND’s convertible note in the latest quarter which has been the center of controversy over the origins of a massive naked short position in FNGR stock. In the past quarter they showed $607,695 of liabilities versus $4,574,824 in the prior quarter. In the latest quarter they also showed an increase in shareholder equity slightly over $1.0 million while paying off nearly all their debt. FingerMotion clearly has their finances under control contrary to the opinion of the SA Author.
This repayment of debt was heralded by the company in April in a press release. FingerMotion essentially signaled an end of dilution for the company. They said the note repayment “eradicates any further dilutive impact of this convertible debt on our stockholders.” They continued to say that this act reinforced the commitment toward building shareholder value. FingerMotion is in a position to explode their top line revenue with initiatives in device protection and insuretec. This is the huge upside that investors have been patiently waiting for.
Technology Play not Fundamental Stock
FingerMotion is not a fundamental stock and fundamental analysis simply doesn’t work for this stock. The SA author uses quant ratings which is an algorithmic scraping of data to come up with ratings to predict future performance in order to prove his point that the stock is overvalued. When evaluating technology stocks just starting the hocky stick part of their growth trajectory curve fundamental investors should steer clear of companies like FingerMotion because it simply doesn’t fit their investment style. The SA author fails at making a solid fundamental argument and also demonstrated his gross negligence on reading about the company and what they do. Any fundamental investors that sold on his analysis really have no business being in the stock.
Shorts Still in Play in Chinese Stocks
Right now, the shorts have no overhanging supply in the form of a convertible note which makes FNGR a risky bet on their part, but the slipshod analysis from the SA author suggests a possible connection to the shorts given the timing and impact of the article. The July option expiration is Friday and there was an explosion of contracts in the July series so the option call sellers have to push the stock below $4.00 for the most calls to expire.
FingerMotion is a technology play not a fundament play. They are the Chinese version of SnowFlake (NASDAQ: SNOW). Their predictive algorithms are very close to being monetized in their Insurtec business which should represent huge upside in revenues and earnings. Their device protection is slated to contribute to revenues and earnings in the coming quarter and that potential should be factored into the stock price. Keep in mind that they have access to 1.6 billion subscribers between the two telcos. The company is expecting to be profitable this year and has also gone on record saying the device protection business would eclipse its core TopUp business. They have no dilution on the horizon. Investors in FNGR are looking for this catalytic announcement because it means a big increase in both revenues and margins. Further on the horizon is the Insuretec business from the Sapientus business.
The future of FNGR places it at the forefront of the artificial intelligence wave in China, which has yet to establish a sizeable foothold. With the backing of the top telecoms China Mobile and China Unicom FNGR seems to be in an unstoppable position when the switch is flipped to start embracing AI. In the meantime, investors should be more than satisfied with the triple digit revenue growth and margin expansion slated from the device protection business to hold them over until the Insuretec business transforms FNGR once again. FNGR is a momentum and artificial intelligence technology play and the SA article is just another bear raid on a solid company with great prospects.
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