Deer in Headlight Reaction. What should Investors Do?
The OTC Marketplace is efficient most of the time, but there are some notable exceptions. It is incumbent upon us to point out glaring divergences between valuation and market capitalization. After the recent news of a transformative acquisition of Adaptive, Xalles Holdings Inc.’s public shares (OTCMKTS: XALL) marked time and barely reacted. The press release had all the buzz words, top level management, revenue growth, blue chip customers, and synergies. This lack of a reaction could be for any number of things, but the fact remains that the company landed an accretive acquisition, a technology company slated to do $5 million in revenues in 2020 and $10 million in 2021. Since this is a holding company these run rates will need to be adjusted, but these estimates give investors a very good look at the multiple to sales ratio based on this newest acquisition.
There are times when news is so shocking that investors have the deer in the headlight stare. We believe this is one of those times where investors should have bought first and asked questions later. Instead investors are taking their time to do a thorough analysis of the situation so they can act accordingly. Impatient money may sell but this roll up play is not only working but thriving. Long term value investors need to take another look at this rising star.
In mid February the company set the stage for a bold strategy that included “geographic expansion, accretive acquisitions, and establishing platform companies.” The OTC Marketplace is the “show me market”, which means if a company plans on doing something the market is unlikely to react until it is completed. What OTC investors love is a track record of performance and XALL shareholders have seen Thomas Nash, Xalles Holdings’ CEO, deliver and deliver big. By reaching his milestones, Nash has developed credibility and trust with loyal shareholders. This excitement amongst the shareholder base keeps long term investors engaged and unwilling to part with their shares for fear that they might miss another acquisition that tops the last one.
Adaptive Acquisition – Crown Jewel
Adaptive is a company that has been around since 2002. It’s a market leader with many blue chip companies to its credit. What they do is take big data and parse it into silos for use at a later date. This is called metadata. Categorized metadata sounds good, but how does that translate to the bottom line? In some companies it results in greater efficiencies. For example, insurance companies have many files and attached to them are stacks of documents and claims. Organizing this seems like a daunting task but the metadata analyzer through Adaptive organizes it in such a way that is easily retrievable to audit or run compliance reports at the touch of a button to comply with any state regulatory requests.
Adaptive Metadata Solutions, Inc. is led by Erick Reehl who was a successful investor of his own accord and was managing director of a $5.2 billion fund. This high caliber talent in a subsidiary cannot be overlooked. The question investors should be asking is why such a talented individual would want to be part of the Xalles vision. According to Nash the answer is synergy.
“The Adaptive acquisition is the definition of synergy. Adaptive will add value to our existing operating companies and technologies, while Argus Technology Partners will expand Adaptive’s reach into new vertical markets.”
Argus Technology Partners is essentially an IT network sales organization. This division seems to be the key to all the acquisitions coming in the door. This division is led by Vanderbilt grad Michael Hogue who also had senior level experience at Hewlett Packard (NYSE: HP), GATX Technology, and Comdisco Inc. He also has 20 plus years in healthcare business development. Surrounding him is a team of motivated and entrepreneurial members. All this team needs are some good products to sell into their existing network and the recent acquisitions are going to stuff that pipeline. There are also going to be various cross selling and upselling opportunities to the blue chip customers of Adaptive, MinervaWorks, and 1Rivet.
Fintech is a term that is typically overused. It’s a combination of finance and technology and some companies classified as fintech are more finance oriented while others are more technology oriented. Fintech even includes cryptocurrency. So fintech covers a lot.
- Payment Processing
- Peer to Peer Lending
- Mobile Banking Solutions
- Person to Person Payments
- Financial Services
Alibaba (NASDAQ: BABA) is not only a Chinese platform in which to buy merchandise, but it also a payment mechanism. Chinese phone payments are hitting all time records every month. Alipay has a commanding market share and the Chinese use it to pay their bills. One of its joint venture partners through TMall is FingerMotion (OTCMKTS: FNGR), which is an emerging player in the mobile recharge business. FingerMotion recently launched its big data insights unit called Sapientus, which uses proprietary algorithms to create a scoring system for opt in applicants purchasing insurance in China.
PayPal Holdings (NASDAQ: PYPL) is a leader in online payments but it has grown its person to person payment platform called Venmo. It’s also on an acquisition binge trying to expand its user base. Paypal estimates it has 325 million active users and has set the goal post that it plans to grow users over 1.0 billion.
Intuit (NASDAQ: INTU) provides financial solutions via its QuickBooks and Turbo Tax software. It’s recent focus is to serve “gig economy” workers allowing them easier ways to track expenses and mileage via their mobile devices.
Square (NYSE: SQ) is an amazing story that evolved from people wanting to use their smartphones to take credit cards. They turned this concept into a company that now processes over $100 billion. They have also expanded vertically to launch their small business lending platform called Square Capital. The story is just beginning as they added new products like Cash App which has approximately 24 million active users.
Fiserv (NASDAQ: FISV) is a product of a mega fintech merger with First Data Systems in 2019. Fiserv provides payment solutions to banks, financial institutions, and other organizations which include ACH, bill payment, lending and credit solutions, financial software, and point-of-sale terminals through its Clover subsidiary. This was a $22 billion all stock merger so the company is going through a consolidation period which means the valuation is on the low end.
Green Dot (NASDAQ: GDOT) had an interesting start a number of years ago when it got started in the prepaid credit card business. It’s niche has always been the unbankable sector targeting people with poor credit or no credit. Their platform is the backbone of other successful payment mechanisms such as Apple (NASDAQ: AAPL) and its Apple Pay cash transfers. They have a bank charter which makes them a very attractive buyout prospect despite their low price to sales ratio. This is perhaps the best value in the sector next to XALL.
XALL has been in a very strong uptrend since it’s purchase of MinervaWorks which has had a fundamental effect with respect to revenues and profitability. This fundamental turning point corresponds with the technical bottoming of the stock price. Since the acquisition, volume has swelled and the stock has been in a gradual uptrend staying above the 50 moving average shown in blue on the chart. Recently the stock entered a consolidation period. All the acquisitions announcements since MineraWorks were characterized by strong volume moves. The lack of volume on the acquisition of Adaptive can be looked at as a positive or negative with respect to the chart pattern. The $.03 level represents sizeable resistance that should have been eaten through on this positive announcement. Given all the potential catalysts, there appears to be an upside bias. It may take time to resolve to the upside, but one motivated buyer could send the stock flying.
Near Term Catalysts
With so many acquisitions completed, the company should start with some status updates regarding the current performance of the subsidiaries. It’s expected that MinervaWorks will have some large contract awards or announce unit sales or a pipeline report. The companies they purchased also have many blue chip clients which could result in cross selling of services. This may take time to percolate, but it is forthcoming.
The company also has a 1-A on file with the SEC and it could become effective in short order. Once effective, they could raise equity to further advance their business plan. Any significant money raised under this offering could be a near term catalyst as investors see that there is money in place to execute the business plan. The company also has been eyeing an uplisting to OTC QB.
The fintech space is really hot right now and should it cool off it would trickle down into the smaller names like Xalles. XALL has a daunting task of integrating a number of acquisitions. With so many acquisitions to assimilate, the company runs the risk of poor execution of its business plan. The hub of Xalles growth strategy lies in the Argus acquisition and its ability to grow sales across many product lines. Any hiccup at the Argus hub could affect the subsidiary spokes. The hub and spoke concept is great as long as the hub is rock solid and until they ramp operations it’s difficult to predict.
The company is low on operating capital but seems to get by without any toxic convertible debt. The notes have all been retired and much of the debt was converted to equity leaving the company with a relatively clean balance sheet. There is an 1-A that should be effective shortly and this may serve as a mechanism to raise capital. In the past, the company has been able to attract loyal shareholders willing to fund the company for restricted stock. Since Sept 2019 the O/S has grown only 9% from 494 million to 538 million in the recent quarter. There is always a risk of dilution, but management seems to be very judicious in the corporate oversight. Should the company raise money via the 1-A or any other method the funds are earmarked for growth initiatives. Although this is dilutive, it is really a net positive by allowing the company to pursue exponential growth instead of organic growth.
The Adaptive acquisition was transformative to Xalles. Since very little volume has traded since the announcement it is safe to say that it is not factored into the stock price. The press release was well written, it’s all in there but the market seems to be asleep at the wheel. Value investors will see this report and realize that this company is morphing into something truly special. Xalles has a current market cap of $17.4 million and is expected to have a $12.5 million revenue run rate in 2020 and a $34 million revenue run rate in 2021. The current price to sales ratio is 1.4x for 2020 and .5x for 2021. The price to sales ratio ranges from 3 – 19 for other fintech players and averages 10.3. Assuming a modest price to sales multiple of 4 the 12 – 18 month price price target falls between $.08 to $.37. The Adaptive acquisition should remind investors about the upside risk that Xalles could at any moment report on another accretive acquisition. At any given time there always seems to be a reason to own it or a reason to not sell it which is why this stock continues to drift higher.
We will be updating our subscribers as soon as we know more. For the latest updates on OTCMKTS:XALL, sign up today!
Disclosure: Insider Financial and its owners do not have a position in the stocks posted and have posted this article for free without editorial input. This article was written by a guest contributor and solely reflects his opinions. The author may hold either long or short positions in the securities discussed.