Wednesday, November 19, 2014

MGT Capital Investments 3rd Quarter Overview

This isn’t the first time I’ve written about MGT Capital Investments (MGT), and I’ve been following MGT for some time now. To cut down on redundant arguments, I will direct you to some of the previous articles I’ve written:
  1. Sep 2, 2014 - MGT Capital Investments Stock On A Wild Ride
    In this article I explain that MGT’s management expecting to use positive gross margins from DraftDay to fund operations was optimistic at best.  As the numbers show in my article below, the company lost more in 3 months running DraftDay than whatthey paid for the entire site in April. I also explain that daily fantasy sports websites require significant financial investment and MGT does not have the capital (or access to capital) required to sustain operations for much longer.
  2. Sep 4, 2014 - Is CEO Robert Ladd Good For MGT Shareholders?
    One thing CEO Robert Ladd is good at is investing in business units that only cost the company (shareholders) more & more money each passing quarter. I’m not 100% if this is a semi-elaborate way for Robert Ladd to enrich himself and a small number of insiders, or if he’s just a poor businessman. Either way, his mismanagement and odd acquisitions have deteriorated shareholder value and makes investing in MGT a very bad idea even as a speculative penny stock play. In this article I also touch on – what I believe to be (NEAR) worthless business units – MGTPlay, RealDeal Poker, and SlotChamp. Again, I’m not 100% sure if these business units (subsidiary companies) are in existence to actually create something of value, or to funnel money into the pockets of insiders. That or Mr. Ladd simply has poor judgment when making acquisitions with shareholder money. Either way it shows you cannot trust the management MGT – and if the company is still around in a few quarters I’ll investigate further what really might be going on with these business units. For now, all 3 are D.O.A and likely will never materialize any value for the company or shareholders.
  3. Sep 9, 2014 - Low Turnout For MGT's DraftDay Fantasy Sports Website Week 1
    This article was really just to illustrate how daily fantasy sports websites don’t print money. In fact, they are a good way to burn through money, which is probably why the original owners of DraftDay sold just months before the 2014 NFL football season started. I’m not 100% certain the daily fantasy sports website business model (as currently constructed) will even be sustainable in a few years, but that remains to be seen. What is evident (as represented by the 3rd quarter numbers I post below) is that these daily fantasy sports websites are a poor investment for a company that doesn’t have much capital or access to the capital required to sustain a daily fantasy website while the industry is still not profitable.
How is MGT funding operations?
ATM Agreement
Pursuant to the ATM Agreement, the Company may offer and sell shares of its Common Stock (the “Shares”) having an aggregate offering price of up to $8.5 million from time to time through the Manager (Ascendiant Capital Markets, LLC).
For the nine months ended September 30, 2014, and through November 14, 2014, the Company sold approximately 1,274,471 shares of our common stock under the ATM Agreement through an “at the market” equity offering program for gross proceeds of approximately $1,407, before related expenses. The proceeds will be used for general corporate purposes, including, but not limited to, commercialization of our products, capital expenditures and working capital. As of November 14, 2014, the Company has approximately $7.1 million remaining under the program, assuming sufficient shares are available to be issued. (p. 10 3q 10-Q)
The company will raise funds in this fashion in order to keep the company solvent through September 2015 (last quarter the company expected to have enough cash through June 2015, so there is one sign of improvement). While these types of fundraising rounds are not particularly rare, it will create an overhang on the share price as long as the agreement is in place and the company is not producing positive cash flows. Additionally, with MGT stock trading near or under $1.00 per share – it potentially means millions of shares will be added to the share count without the advanced notice a secondary offering usually provides. Essentially if you’re a holder of MGT shares, your valuation metric needs to factor in the company will be issuing and selling common shares in order to continue the already dismal outlook the company has. Considering the company’s loses are accelerating at a rate that will burn through the remaining cash on the balance sheet and the ATM agreement allowance, paring back operations would be the prudent thing to do but becomes more difficult when operating a public facing website like DraftDay.
Do Daily Fantasy Sports Websites Make Money?
MGT’s 3rd quarter spans the months of July, August, September and includes week 1through week 4 of the NFL football season and the tail end of the MLB baseball season.
Revenue - $297
Overlay – ($168)
SG&A – ($892)
R&D – ($40)
Figures in thousands
The overlay figure was one I brought up in September after witnessing very weak signups during the first week of the NFL season and it’s something even the larger sites have to account for. More alarming to shareholders actually should be the SG&A figure ($892) is 3x the revenue figure! Keep in mind that SG&A expense is likely going to trend upward even as revenue trends up, so the company needs to grow the business more than 3x to simply break even!  I thought daily fantasy sports was blowing up? In actuality it’s costing the company & shareholders money it can’t afford to lose. Now you can see why the previous owners & investors in DraftDay sold to MGT for less than FY revenue. As you can see the costs associated with running a daily fantasy website is significant and the ability to generate revenue is small. In September I laid this all out for investors to realize in this article. In fact, evidence shows that the entire US market for daily fantasy sports generates less moneythan the New Jersey regulated casino/poker websites – which have fallen well short of expectations. In case you missed that – one (very small) state generates more revenue on poker/casino websites than the entire daily fantasy sports market. Still think daily fantasy sports websites are a good investment?
Is the “3rd Largest” daily fantasy tag safe?
I’ve always found it a bit confusing (and somewhat laughable) the company boasts being the 3rd largest in the daily fantasy sports website – with no tangible plan laid out by management to move into (or even compete with) #2 or #1. It’s almost like the company is comfortable being #3. The main problem with that logic is MGT doesn’t currently generate positive cash flows from DraftDay and/or FanThrowdown, so being #3 isn’t even sustainable. While it’s likely the daily fantasy sports market expands in the coming years, it could be argued most of that growth will flow to top and/or will require considerable investment until that day comes. Additionally, if the market expands enough to support multiple (profitable) operators, the competition to be “#3” will become harder for MGT to hang onto as more nimble upstarts enter the market. And in fact, there’s evidence that MGT’s DraftDay is already facing competition from sites that recently launched.
To give you an idea how quickly daily fantasy sites can gain traction, Ruckus Gaming, opened it’s office in April 2014, reported a $2m fundraising round in August 2014, launched in beta mode in August 2014 – and now has guarantee NFL prize pools that are larger than MGT’s DraftDay.
The largest guarantee prize pool on DraftDay on Sunday November 16, 2014 was the $12,500 guaranteed "The Benjamin.”  On, the site owned by Ruckus Gaming, the highest prize pool was a $22,000 guarantee "Lombardi" contest … nearly double that of DraftDay. Additionally the second highest guarantee prize pool on Victiv was a $11,000 “Lambeau” contest - only $1,500 less than DraftDay's highest guarantee.  So while guarantee prize pools aren’t the only measure of success for a daily fantasy website, it does display that competitors that were opening new offices in April and in beta mode in August can boast larger guarantee prize pools than DraftDay, which has been around since 2011. Competitors without an eye to the bottom line, shareholders, or excessive executive compensation packages likely have an advantage over MGT who can’t afford to be as nimble and forward thinking as upstart competitors can. In conclusion, if your thesis to invest in MGT is because they share a piece of the daily fantasy sports market, it appears that piece will get harder to maintain as competitors with a few million dollars in fundraising and not even 1 year in the business can gain market share. Imagine if companies with the resources like Yahoo, ESPN (ABC), CBS, or even the NFL itself decides it wants to dip it’s toes into the daily fantasy sports market? How safe will the “#3” tag MGT places on itself be then? Will MGT brag about being #4 or #5 in a few years?
NBA now owns a piece of FanDuel
In an interesting move last week, FanDuel announced a partnershipwith the NBA – where the NBA acquired an equity stake and seat on the board at FanDuel. While competing sites like DraftDay & DraftKings will still offer NBA contests, the NBA is now clearly in bed with FanDuel, which should be a cause for concern for every other daily fantasy website. One threat to DraftDay & others would be if the NBA decided to make FanDuel the “exclusive” provider of NBA real money daily fantasy games (or a version of a game), much like they’ve done with apparel, TV, trading cards and other business relationships. While I think that threat is minimal, now that the NBA owns a piece of FanDuel – it’s something that could materialize in the future.
Investing in MGT because they own a fraction of the daily fantasy sports market is ignoring the facts while being in love with the story. Sometimes (often times) the story is better than the stock. That is the case here. Larger competitors like FanDuel and DraftKings are blowing through money faster than a teenage girl at a shopping mall. Other competitors and MGT are doing the same thing on a smaller scale. In my opinion, all daily fantasy sites are still several years away from being profitable, mainly because the barrier for entry appears to be about $2 million dollars of seed money and some office space. Additionally, if/when daily fantasy sports sites become profitable – that’s when larger players will sweep in like Yahoo, ESPN and/or CBS to take all the moneyconsidering they have massive player databases due to providing free contests for over a decade. As a side note, I’m not sure why the daily fantasy sites haven’t tried to attract more of the free and/or season long league action that is monopolized by the three companies I mention. Wouldn’t a freemium model work well for these daily fantasy sites? Draw players in like Yahoo/ESPN do – only to upsell them to the daily leagues as they check their lineups each day. Seems like an easy way to acquire potential players – and likely would cost less than it does to run some TV ads or partner with a league. Just a thought.
In my opinion, taking even a small speculative stake in MGT is like throwing money down the toilet. You’d be better off depositing the money on DraftDay and trying to win cash in the daily fantasy sports contests the site offers. The company doesn’t hold regular conference calls and the communication you get from management is always light on strategy or plans for the future. Management could have kept the business model much simpler (and less capital intensive) by not acquiring public facing companies like FanThrowdown and DraftDay – and collected compensation for years by flying under the radar and stringing out a patent litigation lawsuit that will take years before any verdict is handed down or any royalty checks are written. With that being the case, I actually lean toward CEO Robert Ladd just being a poor businessman/leader/decision maker over MGT being a semi-elaborate way for Mr. Ladd and a small group of insiders to enrich themselves. Either way Mr. Ladd is not someone you’d want to trust with your investment dollars with, and the entire history of the company’s share price has proven that to be the case.

I’ve never owned shares of MGT – long or short.

Thursday, September 4, 2014

Is CEO Robert Ladd Good For MGT Shareholders?

"I am sure shareholders will be none too pleased to learn how Mr. Ladd is spending his time these days while shareholder value continues to precipitously decline. " June 9, 2014 -- Iroquois Capital Management

Leadership. Stocks are just hopes & dreams without it. At best, this company is a case of a President/CEO who has no idea what he's doing dabbling into an array of business models which don't ever seem to meet shareholder expectations or initial hype. At worst, it's a calculated pump & dump operation that only maintains solvency to finance Mr. Ladd and other managements lifestyle.

Lets take a look at some of the blunders Mr Ladd overseen recently:

Flashback to last year and regulated online poker was supposed to help turn Atlantic City casinos around. In reality more properties are closing than thriving in the area and online poker was never going to change that. But flashback to July of last year and Atlantic City casinos were establishing partnerships with online poker providers:
  • Caesars Entertainment and 888
    (Caesars owns four Atlantic City casinos: Harrahs, Caesars, Showboat, and Bally’s)
  • Boyd Gaming and (Boyd Gaming co-owns The Borgata).
  • Golden Nugget and Bally Technologies
  • Trump Taj Mahal and Ultimate Gaming
  • The Tropicana and GameSys
  • Trump Plaza and Betfair
  • Resorts and PokerStars
  • (Source: Online Poker Report July 2, 2013)
AFTER all this - MGT acquired assets from Gioia Systems which included Real Deal Poker - a machine that deals cards with a tracking device so the deal can be audited. Here's CEO Robert Ladd's plans at the time:
 "As U.S. states begin to allow betting on online poker, we expect Real Deal to offer regulators the only way to ensure fairness and allow for full transparency for any card dealt online.  We expect to partner with casinos as they offer online poker to adults in Nevada and New Jersey.  We also plan to license the Real Deal technology to other legal online poker sites that wish to offer their customers a more true-life poker experience." September 4, 2013 - CEO Robert Ladd
Notice CEO Robert Ladd states that they expect to partner Real Deal Poker with casinos .... while two months prior - all the major casinos in New Jersey had already partnered with online poker providers who have their own technology .

Real Deal Poker, which as early as 2010 was never really taken seriously by the poker community but bloggers as late as December 2013 still saw value in Real Deal Poker - all while the New Jersey casino's had already decided on providers in July. We understand MGT shareholders didn't pay a huge sum for this technology, however it shows Ladd's willingness to exaggerate the potential of assets and/or misjudge the potential for that technology. It also shows how MGT acquires assets - only to not really do much with them except spend shareholder money on costs/fees associated with running those assets.

Here's the next example:

MGT Studios is publisher of social games and real money games of skill.
Avcom is a game development studio producing free to play mobile and social casino–style games. Avcom’s assets include physical and intellectual property associated with Mobilevegas and, as well as a game under development titled “SlotChamp”. (p.8 10-Q)
At the time of publishing this - Avcom's website for MobileVegas ( was not working. The website did have some information about SlotChamp - however the links to the mobile app stores were not working. worked, but the company's last blog post was February 2011 and the company hadn't tweeted since August 2011. Essentially the websites looked like ghost towns. Here's what MGT has spent on the aforementioned websites/apps:
Prior to entering into the Avcom Agreement, Avcom had performed certain game development consulting services for the Company for which Avcom received an aggregate of $146 as consideration for such services in 2013.
In the six months ended June 30, 2014 the Company recognized $113 of research and development expense (2013: $nil), attributed to product development costs in MGT Studios. (p.20 10-Q
What has MGT Studio's "partnership" with Avcom done for the company's bottom line?? Nada, zero. What did the company produce for that much money? Is the money actually going to building something because I don't see much? Aside from that, building mobile apps is clearly expensive and trying to make a hit game is probably like trying to write a hit pop-song. Lots try, most fail and the few who succeed get rich. Remember the quote from Iroquois Capital Management at the top - you think Mr. Ladd is working hard at creating a great mobile app company? Doesn't seem like it.

The companies other venture under this business segment is
On December 4, 2013, the Company entered into a Strategic Alliance Agreement with M2P Entertainment GmbH, a German corporation (“M2P”). Pursuant to the terms of the Strategic Alliance Agreement, the Company will advance certain expenses to M2P Americas and the Company and M2P will provide network and human resources support to M2P Americas. (p.9 10-Q)
What is It's simply a skin of M2P Entertainment GmbH's website: Additionally a visit to the MGTPlay Twitter account show no tweets since June 2014 and the account only has 10 tweets total, all happening in about 1 weeks period of time. (And don't think those followers are real, for $5 - $10 on Fiverr and other sites you can acquire as many twitter followers you want). The company now includes a link to in the company description that appears on financial blurbs. However, the website is essentially a skin and the company has spent only 1 week trying to promote MGTPlay on one of the worlds largest social media platforms. Now you know why shareholders are questioning what CEO Robert Ladd is doing in his free time.

Also notice a pattern of 'ghost town' websites & assets is following this company, and it continues ...

DFS Agreement is a partnership between MGT's FanThrowdown and daily fantasy players Nicholas Dunham (1ucror) and Charles Chon (Conida). These are two high-stake fantasy game players, who hardcore daily fantasy game players will recognize - but the casual or average player will not.
In exchange for expert promotional and site design services and subject to receipt of the applicable deliveries by the Consultant the Company agreed to provide the following compensation to the Consultant:

Each month, MGT shall issue to the Consultant 5,000 shares of MGT Restricted Common Stock, payable monthly in arrears. For the three and six month periods ended June 30, 2014, the Company has expensed $24 for the services.

Additionally, on the date hereof, , the Company agreed to issue to the Consultant a warrant to purchase 100,000 shares of common stock, which will vest immediately upon issuance. The warrant was valued at $80 utilizing the Black-Scholes Option pricing model based on 75% volatility rate. For the three and six months ended June 30, 2014, the Company expensed $34 relating to the warrant. (p.14-15 10-Q)
When I last checked FanThrowdown's website (September 3, 2014 at 2:26pm PST) the only games on the site that seemed to have any players were games priced under .25 cents. In fact, a 1 cent tournament where the top 100 contestants got paid only had 58 entries with about 1 1/2 hour until first pitch.  The site did not have NFL games on the site yet, and the 1st NFL game starts the following day. A scan of rival FanDuel & DraftKings show multiple players signing up for games that cost as much as $200. Both websites had College Football matches being played Thursday night (let alone NFL, MLB, PGA .. ect). The company twitter hasn't tweeted since August 14, 2014 and we're on the doorstep of the hottest season for daily sports. FanThrowdown is a virtual ghost town today and doesn't contribute to the bottom line. Looks like MGT's decision to hire some consultants hasn't yielded any positive results and FanThrowdown joins Real Deal Poker and MGT Studio's as another ghost town website/asset.

Did MGT Overpay For FanThrowdown? You bet MGT overpaid! They paid $2.5m for a 65% stake in FanThrowdown last August. Now FanThrowdown can only fill the micro-stake games and doesn't have NFL daily fantasy contests 1 day before the NFL season stats - proving that daily fantasy sports sites can bust as quick as they can go boom.
On April 7, 2014, the Company closed on an Asset Purchase Agreement (“Agreement”) with CardRunners Gaming, Inc. to acquire business assets and intellectual property related to for cash consideration of $600 and stock consideration of $190, consisting of 95,166 shares of Company’s Common Stock at $2.00 per share (valued on the date of close).  (p.17 10-Q)
For those of you without a calculator handy .... that's $790,000 for 100% of DraftDay and $2.5m for 65% of FanThrowdown which appears almost dead. Scroll up to the top of the post and read what Iroquois Capital Management said about Ladd. Do you think Robert Ladd, based on his track record, will build DraftDay into a highly profitable asset for MGT shareholders? Fast forward 1 year and Robert Ladd will likely deteriorate DraftDay's value, much like he did with FanThrowdown and every other assets I've described above.

Lastly - MGT's slot machine patents.
Guys, I am no lawyer or judge. I learned years ago as America was glued to the O.J. Simpson case that just about anything can happen in court. Additionally, considering this matter will likely be in the hands of attorneys - Robert Ladd's ability to screw this up go down. But trying to predict an outcome would be like betting on picking this years Super Bowl winner correctly. It's gambling. Which is fitting for MGT shareholders considering the attempts management has made to win in those markets but lost. It's also clear lawyers don't come cheap:
Selling, general and administrative expenses were $165 (2013: $205), attributed to legal fees, consulting costs and amortization of the intellectual property assets. (p.20 10-Q)
Additionally, royalty payments won't come soon even if there's some kind of miracle swift act of justice. Companies will fight paying a royalty payment tooth-and-nail so don't expect any kind of big payoff soon. In the meantime, you are trusting Robert Ladd and other management to generate some positive gross margins from DraftDay in order to fund the business considering what is listed above is D.O.A. At best, several rounds of dilution will occur before MGT wins some kind of judgement in court and actually collects a check from anyone. You might sell your entire portfolio and move to a private island in Jamaica by the time MGT ever collects a royalty check. Robert Ladd knows this is his ace up his sleeve - and can buy him time to infinity with investors because court cases always drag on. Until then, you need to trust him running the existing & future assets of this company.

So you wonder how Robert Ladd spends his time these days? You'd be surprised. He's not sweating over any of the issues I've brought up here. Just ask the people that know what he's been up to recently. 

Tuesday, September 2, 2014

MGT Capital Investments Stock On A Wild Ride

For the last year I've been following the developments of MGT Capital Investments (MGT) - mainly because of interest in the daily fantasy sports market, so this article will largely revolve around that segment of the business. However, there's much more going on at MGT than daily fantasy sports and simply investing in MGT because they own (or partly own) 2 daily fantasy sports websites is simply ignoring the business models that are draining cash from the business. But that's for another day & another time. While on the sidelines watching, I've seen current management see these major events happen during the year:

At this point the company's stock was trading under $1.00/share and there were bankruptcy rumors given the cash position the company has. Since then the company has released a 10-Q that did provide more details on DraftDay revenue, but still has a bleak outlook in terms of cash on hand.
On June 30, 2014, MGT’s cash and cash equivalents were $2,425 excluding $138 of restricted cash. The Company continues to exercise discipline with respect to current expense levels, as revenues remain limited. Our cash and cash equivalents have decreased during the six months ended June 30, 2014, primarily due to $2,458 used in operating activities. (p.21 10-Q)
Some investors thesis to invest in MGT has been because of the growth surrounding the daily fantasy sports market - where I worry about the company cash on hand given the company should still be in a growth mode in the daily fantasy sports market. Top daily fantasy sports websites like DraftKings are still in fundraising mode themselves ... certainly the #3 daily fantasy site needs to raise/re-invest money too? Instead the company is counting on DraftDay to finance some of the company's operations until cash is expected to run out next year.
Management believes that the current level of working capital combined with gross margin from DraftDay, along with the At the ATM Agreement, will be sufficient to allow the Company to maintain its operations into June, 2015, at which point the Company may need to seek additional sources of financing. There is no guarantee that additional sources of financing will be available or on terms acceptable to the Company, if at all. (p.22 10-Q
(Bold Emphasis Added By Me) 
Shareholder's with the thesis that daily fantasy sports are going to explode - I'd be a little worried that top competitors aren't relying on gross margins or free cash flow yet ... they are raising $41 million dollars!! Those competitors (DraftKings & FanDuel) already have mobile apps, bigger guarantees, larger prize pools, more players, partnerships with the MLB ... ect ... ect. Now DraftDay will need to use cash that should be re-invested into DraftDay to fund operations at MGT??


Wait until Yahoo, CBS, ESPN or even the NFL themselves decides to build there own site or partner with one of the 2 largest players who have investor money to burn!

Forget all that - daily fantasy sports is a seasonal business. It revolves around football season where all teams play for about 4 months out of the year. Additionally several US states don't allow you to play at all including: Arizona, Iowa, Louisiana, Montana, Washington and the Canadian province of Quebec. So a thesis that fantasy sports will blow up is not analyzing that the market is already inherently limited to certain geographic locations.

Forget all that part II - You are losing either way. If MGT Capital Investments is successful in bleeding cash from DraftDay to support company operations, competitors who are already larger than DraftDay & FanThrowdown combined will surely crush them even further because they are re-investing into the company and MGT is not? Now let's assume MGT is kidding themselves, and investors that they won't need to raise money given they only have 2.4 million in the bank. You lose that way because MGT will likely have to raise money in via shareholder dilution given the company seems a ways from profiting from any other venture it's involved in.

The thesis that buying MGT because you're getting in the daily fantasy sports market 'cheap' doesn't factor in any potential fundraising, or the fact that larger competitors are still in fundraising mode themselves - while MGT is planning on using the free cash to fund operations.

While the short term pops in MGT stock might be spectacular, I believe the long term outlook remains bleak. The company will have to raise funds at some point in the next 12 months - leading me to believe further dilution is ahead. If you believe in MGT long term, waiting for that fundraising round, or the hype of the NFL season to wear off will likely be a better entry point than today's price.

Wednesday, August 13, 2014

Q & A With New Investors - PCI Stock Blog Mail Bag

Dear PCI Stock Blog - I would like to hear your take on Tesla 

I love Tesla's product, the CEO is amazing, but the stock is out of my league. Essentially they make 1 model car right now. In essences, it's like buying stock in the Corvette and not all of GM. I think once Tesla introduces the Model X and other more affordable models they might make a more attractive investment because they are likely to experience some hiccups that might spook investors. Right now the stock's valuation is out of this world, and while it can certainly stay that high for long periods of time (like Amazon stock) .... personally I'd only be able to afford a small number of shares, so it doesn't make it worth it. Could I play the options market? Sure, but again, the stock has a cult like following that timing moves in the option market is risky. Tesla stock is well covered in the media so I will continue to follow Tesla (and I wish I could afford one of their cars), but for now I feel the stock has gotten ahead of actual performance & too risky for me to want to invest. 

PCI Stock Blog - Should I look to invest in (WSTI) World stream Technologies? They sent out a flier. Stock is at .69, is this a good stock or is it just all hype?

99% of the time it's a bad idea to invest in a stock where they need to solicit investors. Wall St. doesn't miss too many good stories, or hidden gems - so a company asking for people to invest is like the panhandler on the street corner. Also any company under $1.00 has some major issues considering the entire stock market has never been higher. In 2008, buying certain $1.00 stocks was arguably a good idea, but now I avoid it at almost all costs in 2014. Also, WSTI is traded on the OTC BB - which is essentially a place where companies that were once traded on NASDAQ or DOW go because they've been kicked out of the DOW/NASDAQ - likely because of not trading at over $1.00 and/or because they haven't reported necessary documents to SEC/Investors. Additionally, WSTI actually has a negative book value - meaning if they were to sell all assets of the company, they (shareholders) would actually owe money ($0.03 per share)

Using the same book-value metric on Tesla stock actually values the company at around $7.00 share: and shares are over $250 each! Shows you how that book value really doesn't mean too much, but when it's negative - that's a really bad sign. 

Good question though - I'm not trying to beat you down with my answer, just trying to show you the process you should develop when objectively analyzing a company. Because there are so many investments/stocks you can put your money into - develop a series of "red flags" and when a company breaks those rules - you avoid the investment. For me, sub $1.00 stocks and ones traded on OTC BB are a no no given the risk involved and given the majority of those investments go bankrupt. Additionally it saves me time - I didn't have to read WSTI balance sheet, listen to conference calls or read the financial blogs to form an opinion about the company. While they might end up being the next diamond in the rough .... mining for diamonds is hard work - I'd much rather park my money with a company that has proven itself to investors & more importantly to consumers. 

Hey PCI Stock Blog - What are the best investment magazines?

I actually don't subscribe to any magazines, but instead read mostly online these days. However I read the Wall St. Journal newspaper. I read some of Bloombergs publications. The Motley Fool has solid content and good podcasts. Power Trading Radio podcast is entertaining. I read lots of stuff on - but keep in mind nearly all the articles are biased because the author is trying to get the stock to go up/down. However, it can give you an idea why investors love or hate a particular stock and you can get a greater insight into the company by reading this. Lastly, the majority of what I read are documents that are released by the company to the SEC. Quarterly reports, annual reports and balance sheets often will say a lot about a company, but are often 200 page documents where only 3 or 4 sentences really matter. Digging through them takes some time, but is worth doing when you have a specific stock you want to invest in.

PCI - Are there any management firms better than the other ones (Scott trade vs Schwab)? 

E-Trade, TDAmeriTrade, Sharebuilder - or the two you mention. Sharebuilder is a discount broker I started with because they offer lower trading commissions, but with some restrictions on when you can trade. Schwab, TD, ScottTrade ...ect all have commission free ETF's and Mutual Funds you can invest in, so I tend to invest in those type of things because you're saving some money. Feel free to call each one on the phone & ask them any questions you have, the major brokers often have very nice customer service people.

Monday, July 28, 2014

How to Make Money Day Trading the Forex Markets

Are you one of those people who have a regular job and interested to build a stable second income? Perhaps you have already tried trading the forex markets but your current situation didn’t allow you to become a full time trader? Or maybe, you are considering leaving your full time job so you can dedicate more time trading? No matter what your situation may be, it is possible to make money day trading the forex markets, even if it means you don’t have the time to trade by yourself. And no, we are not talking about a managed account or something else. But rather, you can make money day trading the forex markets and yet be fully in control of your trading. Sounds too good to be true? Well, read this article to learn how you can achieve this.

Let an EA make money for you, day trading forex
What many day traders with another job might not know, or might find it hard to believe is to automate their trading experience. Just the way, most things in life are now-a-days automated, trading can also be automated so that you have more time for yourself, or maybe attend to your regular full time job without having to worry how the markets are. This automated trading is possible by using a Forex Expert Advisor.

A Forex Expert Advisor, or an EA for short, is an automated piece of software that trades the forex markets without any human intervention. The key to success for a Forex EA is in finding a winning trading strategy. Or in other words, a strategy that is consistent and manages to make more winning trades than losing trades.

ForexFalcon EA – Making money day trading on your behalf 
The ForexFalcon EA is a highly sophisticated piece of algorithm that automates trading for the MT4 trading platform. Day traders can invest as little as $500 and watch the ForexFalcon EA grow the equity by a stable 7% return on investment every month, or up to 125% annualized returns. Having been back tested rigorously, the ForexFalcon EA works on up to 18 currency pairs. A strong risk management criterion ensures that your equity is well protected from taking any big losses.

Simple to use and easy to install, once you purchase the ForexFalcon EA it takes only a few minutes to set up and configure the EA, while it does the job of day trading for you, giving you more time to do whatever it is you want to do. Attend to your regular job or do something else. For the more skeptical people, the ForexFalcon EA also comes with a money back guarantee. So if the EA doesn’t make you a profit within the first month of using it, you can simply request a refund of your $397, no questions asked!

To conclude, people always look for smart ways in their life. Day trading is no different either. Be smart and try the ForexFalcon EA to help you make money day trading the forex markets.

Friday, July 11, 2014

5 Technical Analysis Tools And How They Are Used In Forex

If you want to start trading in the currency market one lesson you can learn from professionals is how to do technical trading. The main goal of technical analysis is to predict profitable trends and cycles in the markets in time to take advantage of them. Technical analyses uses the same ideas whether it is in Forex or in Equities or any other financial market. If you are beginning your career as a trader learning technical trading is often the start. And although there are a wide range of techniques and chart methods the most popular ones are well known:

Trend lines

Trend lines are very common in financial charts they usually represent lines of support or resistance where the price action has historically reversed. Resistance and support lines help the technical trader to plan their price entry levels and stop losses.

Support and resistance lines example chart

Moving averages

The next level up in the toolbox are what is called moving averages. What these show is an averaged representation of the price history over a certain interval. The most common intervals are the 10, 20, 50, 100 and 200 period averages. The 20 period for example takes an average of the past 20 data points as its value so you can use this in a minute chart or an hour chart alike. Forex traders are interested in where these lines cross to suggest if the market is getting weaker or stronger.

Elliott waves

These were first suggested by Ralph Nelson Elliott and accountant who noticed that financial data series usually form a type of wave pattern. He showed that these more often appear in sets of five prime waves on the upward trend and three on the downtrend.


Another method much used by Forex traders is the Fibonacci retracement. This method uses a mathematical formula to estimate pivot or reversal levels in a chart. These are from the idea that a reversal has a predictable pattern such as 50% retracement of the previous high.


Finally MACD is vital in the trader's toolbox, it is made up of two moving averages of different periods. Useful in range bound markets it tells traders when short term trends are likely to reverse. In the end most traders will rely on a few tried and tested tools and grow accustomed to them. The choice will depend to a great extent on the trading style adopted. For example a trader using a channel breakout system will use a different set of tools to a range trader. A momentum trader will use a different set of tools to a carry trader who holds positions for months at a time.

Monday, July 7, 2014

UNTD - United Online On Track For A Turnaround or Slow Burning Death?

  • United Online Was Known For Using Spammy Techniques To Generate Revenue
  • Appears the new(er) CEO wants to clean up some of these practices
  • Will his strategy work out in the long run?

United Online (UNTD) is a company I have been following for a long time. Most average consumers will know UNTD by the Net Zero brand - which had a well known marketing campaign during the dawn of the consumer internet age where they offered "free" internet. Believe it or not, people still use dial-up internet, especially in the more rural parts of the country. Those days are numbered, but the company has bolted on other internet properties to form a company with 2 separate divisions.

Content & Media

For the sake of this article, I'm not going to discuss the internet business in much detail. The company has made a push into high-speed internet, and have partnered with 4G spectrum providers to grow that area of the business. UNTD will continue to use the dial-up/4G internet free-cash flow to fund some of the operations. They are in a fiercely competitive market where UNTD is simply an affiliate of the spectrum provider. Virgin Mobile is a competitor of UNTD, but is essentially employing the same business model. UNTD does not own any of the spectrum, they are simply using the Net Zero brand to market 4G internet service.
I wrote back in January: "Classmates is to social media as BlackBerry is to smart phones. That actually might be a compliment." Honestly, not much has changed, and while we see huge valuations being placed on tech companies - UNTD is an example of one that is being ignored, in part, because the web properties they own are considered.

Another troubling fact for Classmates is that it's business model leads to customer service issues & complaints. Classmates has a revenue model that is closer to an online dating website than a social media site. Members are allowed to browse the site for free, but in order to send messages, see who's viewing your profile ... ect - you need to pay as low as $30/year. It's a difficult proposition, considering you're likely to find the same friend on Facebook or LinkedIN, where you can try to reach them for free. Not surprisingly, some customers do end up paying, but it seems at an ever decreasing rate.

Based on the previous conference call with investors, my opinion of Classmates has not changed. On a recent conference call with investors - the only positive thing the CEO could say about classmates was the mobile traffic 'growth.' What is likely happening is desktop traffic is trending down at an equally negative rate to off-set any mobile traffic growth. The website will experience sequential declines in paid memberships as time goes on. An entire generation is growing up with free social media accounts and are unlikely to be willing to pay for it later in life. At some point the company will have to make a strategic decision with Classmates, as they've recently done with MyPoints, which might give investors hope UNTD can one day resuscitate this brand. Until then, it's business as usual at Classmates and less & less people are willing to pay each quarter for the right to use it.

Here is where the investment story gets interesting for UNTD. Not that MyPoints can all of a sudden become a revenue generating juggernaut in the customer loyalty space - but the CEO is actually taking a risk by changing the business model at MyPoints.

On the last investor conference call, UNTD CEO describes his strategy for MyPoints going forward.

(Bold emphasis added by me)
...the revenue we’re going to be taking out is primarily in two areas. The first area is very low margin gift cards. Now, that’s something where we get gift cards and we resell it to our user and everybody is happy but it’s low margin and it takes effort, it takes time, and it takes [mind] share so I don’t want to do that too much moving forward. The second area we’re taking out a lot of revenue is in our email advertising products. We have so many engaged users who we email very often. We email them every time we get good deals or promotions that we sell to advertisers.
Now, we can send out more emails, and even more, and even more, and sell them to advertisers and revenue will go up but at what point does it cross? At what point do we say, “This is not completely good for the user.” And, at what point does it, excuse my language, piss a user off that they don’t want to remain a member anymore because we are starting to SPAM them. Well, I want to respect our users more. The decisions we’ve taken on is we want to get back to what a good user experience is, respect our users and that’s another big chunk of revenue we are turning down.
(Q1 2014 Conference Call)
While the company took a $15m write down based on the CEO's decision above, this is a great move by the company. #1 it will create better company/employee moral. Employees don't like spamming other people and generally ripping them off, so a company more aligned with it's customers will attract and retain employees who are of high character. #2 the company is finally recognizing that respecting your user is a more sustainable business model and no one likes getting bombarded by spammy e-mail messages.

Bigger Announcement Coming?

During the last investor call, the CEO seemed to insinuate that he will discuss a broader overall strategy for MyPoints on the Q2 conference call. I believe this will be the first of many changes the CEO will eventually make to the Content  Media segment at UNTD. In the short run, I believe the company will loose revenue and traffic - but if he can put an effective plan in place, the revenue MyPoints generates should be more sustainable over time.

My theory is after the CEO went around to visit employees of the company, he learned that the company was making most of it's revenue spamming inboxes and re-billing subscriptions in a somewhat un-transparent fashion. The fact he specifically identified Gift Cards as being a low margin/high labor product they could stop selling leads me to believe he has a grip on the finer details of the company. Instead of continuing to compete in a low margin business, he's focusing on more profitable ventures. While his decision to eliminate certain areas of the MyPoints business hurts revenue in the short term, he clearly has a plan on where he wants to position the website in the future. I can imagine CEO Francis Lobo went to the board of directors after meeting with employees with a large list of changes to both Classmates and MyPoints. The Board more than likely said something like - let's restructure MyPoints first, then tackle Classmates once you prove yourself.

The fact CEO Francis Lobo is going out on a limb should also be a promising sign to investors in the long run. This is a first time CEO who could have easily sat back and milked the Classmates & MyPoints brands in spammy ways while drawing a paycheck. Instead, he's taking a risk by re-positioning MyPoints - and my guess he will be given the keys to do the same thing to the Classmates brand once (if) he proves himself.

Investor Outlook

Okay, so I've been long this company, then short - now I'm just watching. Given the CEO seems to have a plan & is being allowed to implement major changes to these aging websites, I probably won't jump on the bandwagon & buy shares just yet. Here's why: I believe UNTD will feel more financial pain before they turn things around. At the corporate level re-positions, pivoting, re-branding a website is more like steering a ship than driving a Tesla, however UNTD does have the advantage of an existing user database. It's likely the year over year growth will continue to decline in the coming quarters, which might lead to further deflation of the share price.

I will be watching Lobo's turnaround effort with MyPoints, as I believe he will be allowed to overhaul Classmates if he can prove himself. The stock is trading at around 11x forward earnings, which would be on the low end for a growing tech company. UNTD is far from a growing firm, in fact the websites are considering ancient in website years. However, this is one of those situations where a 1st time CEO could establish themselves. Lobo has already demonstrated he's willing to sacrifice profits for the good of the website's user. To some investors this may not seem like a good idea, but in the highly competitive website traffic world - what's good for the end user is good for the investor. Now that UNTD is focusing on the user experience again, they might be able to generate more profits from Classmates & MyPoints.

For now I'll be on the sidelines & watching. This company gets less coverage after spinning off FTD and canceling the dividend, so I expect much of what they will do will fly under the radar. If the turnaround efforts appear to be working, that might be the time to jump in and invest. Right now, I think UNTD will need to prove it can crawl before it runs.

Friday, July 4, 2014

Basic Investor Terminology For Beginning Investors

Today I had a friend of mine ask me to explain some investor jargon that is a language of it's own for those new to investing. The most important thing to remember is that you don't need to memorize or even fully understand all these concepts to become a successful investor - you simply need to be aware of them.

What Is Bid/Ask?
When you are buying stocks for the first time you will usually see 2 columns of prices - Bid and Ask.
Bid = Think of this as the 'offer price' to buy a given stock. For example, let's assume a seller has a baseball card on ebay listed for $40.00 or best offer - and you offer him $30.00 dollars. That $30 offer is essentially like making a "Bid" or offer to buy a stock.
Ask = Using the same example above, the ask would be $40.00 because that is what the seller is "asking" for his shares, or in the examples case - a baseball card.

So in summary.
The Bid Price is what buyers have offered to pay for shares of stock.
The Ask Price is how much sellers are asking for the shares they want to sell.

What Is FOREX? = "Foreign Exchange Market"
Also known as FX, FX Market, the "currency market"
Basically you are trading currencies from around the world ie: US Dollar, Euro, Yen ... ect.
Personally I don't trade currencies, not that it's particularly difficult, just not a market I follow very much. There tends to be a large amount of webspam related to FOREX, that's the only reason why I include it on a beginners guide. If you want to learn more about FOREX trading - make sure the source is a reputable one.

What Is A Mutual Fund? = A group of stocks - often in a common industry - that are bundled together to create a fund.
For example: a "Internet Company Mutual Fund" might have a portfolio like this:

AAPL 100,000 Shares
GOOG 79,000 Shares
YHOO 35,000 Shares
YELP 16,000 Shares

Mutual funds are intended to be a longer-term investment and not meant to be bough/sold within a short time period. In fact, many mutual funds have a ~2% (or more) penalty if you sell within 30 days of purchase. Mutual funds often have a minimum initial investment - for example $100, $1,000 or even $10,000 or more. Subsequent investments are often allowed in lower dollar amounts ranging from $1 - $100 or more. When you buy shares in a mutual fund, there is no bid/ask price - you simply buy the shares at market value. Additionally, when you sell - you sell at the market price. The trades go through after the close of trading for mutual funds. For total beginners, mutual funds are a great starting point for leaning investment basics because buying them is relatively simple.

Mutual Fund Fees:
- Trade Commissions - Typically you can find a broker (or invest directly with the mutual fund company itself) where there is no fee for buying or selling shares.
- Front Load Fees - You will see some mutual funds charge an upfront fee every time you buy shares. For example, a front load fee of 5% means the company charges you 5% for every dollar you invest.
- Back-End Load or Contingent Deferred Sales Load (CDSL) is slightly more complicated than a front load fee. It's better described here.
- The mutual funds the majority of investors should look for are no-load mutual funds. They don't have a front-end or back-end load, however there are management fees associated with the fund usually described as an 'expense ratio."

What Is An ETF? = Exchange Traded Fund
I think of ETF's as a trade-able mutual fund. Essentially a basket of stocks (or similar investments) traded on one of the major stock exchanges - like NASDAQ. The advantages of ETF's over mutual funds is they can be traded, and/or used as a short term investment. Unlike mutual funds, ETF's are traded on the stock market with a bid/ask price.

ETF Fees:
- Trade Commissions - You will typically pay a trade commission fee each time you buy and sell. For example most brokers charge $8.95 - $9.99 per trade. You will find some brokers like Schwab, E-Trade, -Ameritrade...ect who offer some ETF's as a commission free trade.
- Expense Ratio - These are fees that are siphoned off from the fund on a yearly basis. The norm is around 1% but they can get much higher or lower.

What is a Bond?
Think of bonds like debt. On one side you have the borrower, and the other side you have a lender who earns interest as the borrower makes re-payments on the loan. Bonds are very similar. Countries, Cities (municipalities), companies/corporations will issue bonds with a coupon (interest) rate. Buyer purchase the bonds, and earn interest on those bonds until they are paid off. If you forget all that - the most important thing to remember about bonds is as interest rates go up - the price of the bond goes down ... and vise-versa.  For example, today a bond has a price of $50 with an interest rate of 5%. Tomorrow, interest rates go up to 5.25% - the price of the bond would go down to something like $45.

What Are Options?
I strongly recommend only trading options after you have become an experienced investor and trader. Option trading requires you to be correct about the direction a stock is going AND you have to guess the correct time period that move will happen. The average investor will likely not need to worry about options, however a high net worth investor might be wise to hedge portions of your portfolio with options.

In a nutshell, options are contracts to buy or sell stock at a given time.

Monday, June 30, 2014

MBLX - Metabolix, Inc. Broken Promise Means Investors Should Sell Now

  • CEO hasn't done anything but re-run a few investor conference presentations to yawning investors. 
  • MBLX stock has been trading under $1 and they risk being de-listed by NASDAQ.
  • A round of fundraising was promised by end of the month but hasn't happened. 
Effective January 2, 2014 Metabolix appointed a new CEO and investors held out hope he could turn this sinking ship around. 

CEO Joe Shaulson had a lot on his plate. Metabolix needed to raise cash levels on the balance sheet. They also need a commercially viable product, more than likely via a partnership with a larger company. 

Here's what Joe has done:
So Joe's had 5 cracks at trying to drum up some interest in this company and he's come up empty. Given he's been here 6 months, he's probably just happy he got to travel around the USA on the shareholders dime. Certainly that's the only bright spot investors can see come of these conferences. 

Adding to the companies woes is that May 19th was the last day the company's stock was trading over $1.00 per share. As penny-stock investors know, if a security trades for under $1 for 30 consecutive trading days - action will follow from the exchange they are trading on ... and in the case of Metabolix - that is the NASDAQ.

Finally, CEO Joe's "plan" was to have financing in place by today! If you don't believe me, here is what he said to investors on a conference call: (Bold added by me for emphasis)
So yes, I mean our plan – right now, our focus is balanced between financing and operations. I’m looking forward to the point in time where the balance shifts more to the operations than where it’s been for the past couple of months. But I would say that our plan to complete at least the first phase of financing by the end of June and we would expect to have a full set of information for investors about what that financing looks like when we announce it. And to complete it by the end of June, it means we’d have to announce it by the end of June.
- CEO Joe Shaulson (Q1 2014 Conference Call
Trust me, if Joe Shaulson had any positive news about Metabolix to announce - he'd come out with it. The bottom line is he didn't get the job done. Maybe it's because Metabolix is already a sinking ship that Joe couldn't save in 6 months ... or Joe just didn't get the job done. Either way, it's the end of June and there's no financing in place, and the stock currently trades for less than $1 dollar.

Investing in this company now would be like betting on a team who were down 3 scores with only 1 minuet left on the clock. While teams have come back to win in situations like that ... it takes a series of miracles in order to win the game. Metabolix is in that situation now. Any partner/competing company can just wait for Metabolix to go bankrupt. Banks, lenders or deep pocket investors have more attractive investments to gamble on. The only thing Metabolix can do is hope a 1st time CEO can pull off a miracle to save the company. Given that Joe Shaulson has not done anything except travel to some investor conferences (something an 8th grader can do) .... I don't expect any positive news from Metabolix. This company has a very good chance at not being around in 6 months. 

Sunday, June 29, 2014

First Time Home Buyers Common Mistakes

Purchasing your first home is an exciting as well as a daunting task. There are hundreds of artifacts demanding your attention just as you are about to take the plunge to purchase your first home in Australia, and simultaneously you are about to make the biggest transaction of your life. Being ill prepared at such an important juncture can spoil the quintessential balance of your life, disrupting future possibilities and gains. Considering the significance of this step, we here try to bring limelight over some common mistakes and pitfalls of the buying process.

  1. Know about mortgage: - Simply researching the bank’s website and learning what you can borrow isn’t usually enough. There is a huge difference between what websites indicate and what you can actually receive. Your foremost step should be purchasing and analyzing your credit report. The Credit report is an in-depth history of your financial status and stability and is one of the main factors which will determine your eligibility for a mortgage. Check your score well in advance so that you can work it up and increase your chances of receiving the maximum possible amount.

    Subsequently, your next steps should be obtaining a pre-approval. Having a pre-approval will help you plan your purchase in Australia effectively and altogether, it puts you in the best negotiating position along with the mental peace that comes with it.
  2. Utilize your 1st home buyer grants: - Australian government has initiated a program through which it aims at helping first home buyers making their first purchase smoothly and relish their Great Australian dream. Guidelines and grants may vary from state to state, however one can apply for several different types of housing schemes under the program.
  3. Need for Patience and Proper Researching: - Keeping patience is the key for making the best purchase. Out there, there is one home that belongs solely to you so wait for the right time and let the nature unlatch its store at its own pace. I highly advice you against making any fed up purchase. You need to understand that buying a home requires
  4. Persistent efforts and still there is no guarantee that you may succeed within a short period. To conclude, keep up your incessant efforts until you haven’t reached your goal.

    Eventually, don’t let the price tag rule your search. Consider your home as an asset, as they are similar to fixed deposits. So invest your money in Australia in right property, instead of cheap property. You will understand the value of your investment later when the prices increase and which won’t be the case with cheap purchase.
  5. Investigate thoroughly: - Before entering into any contract with any seller in Australia do as exhaustive investigations as possible. If you personally are not capable, hire an expert for help. Once you have signed the contract you purchase the entire defects along with the home, additionally these defects can upset your finances. Ensure that every appliance is in working condition, and if possible engage a pest inspector along your side.

Furthermore, don’t forget to read your contract at least once. Sign the documents only if you are satisfied with the house and clauses of the seller. Ensure that you are getting an adequate number of right protection clauses inserted in the contract of sale. There are several other issues to consider but, hopefully, these guidelines will help you avoid some of the common mistakes as you endeavor towards your first home in Australia.

Wednesday, June 11, 2014 Stock Still A Sell After Latest Quarterly Report

I've been following WIX since they went public not too long ago. If you are not too familiar with their business model, I write about it more here, and I'll give you a quick run-down now:

Basically anyone can setup a website using's "intuitive drag & drop" software. For free. If you don't mind your website domain being (and Wix ads running on your site), you can use Wix for free. The free service level is similar to what Google offers with Blogger and Yahoo offers with Tumblr.

If you want more advanced features for your website, like a regular .com name, no Wix branding/ads, a shopping cart for eCommerce, or the ability to host large files or photos - you are forced to pay Wix, in a similar fashion other hosting companies like GoDaddy, Hostgator, Rackspace and Amazon charge for server space. Essentially you pay for the space per month - so it's not a commitment that the average person needs.

Wix's primary way to make money, is by charging customers for website hosting and other website services. In essence, they offer a drag & drop website builder (that is proprietary) but only charge for it if you want features that other competitors offer as well. They have a goal of making the app store (more on that below) a meaningful contributor to earnings, but so far it's not.

Here are some key statistics from the latest quarter: (Source Of Data Q1`2014 PR)
- Bold Emphasis Added To Make Me Look Good

  • Registered Users: 46.2 Million - As of March 31, 2014
    45% YoY Increase + 4 Million added in quarter
  • Premium Subscription (Paying) Subscribers: 908,000
    65% YoY Increase + 118,000 added in quarter (record)
  • Q1 GAAP Net Loss: $14.9 Million

Three Months Ended
March 31,
Cost of revenue3,0155,240
Gross Profit12,50723,607
Operating expenses:
Research and development5,53411,966
Selling and marketing10,52622,178
General and administrative1,3413,960
Total operating expenses17,40138,104
Operating loss(4,894)(14,497)
Financial income, net26184
Other expenses --(3)
Loss before taxes on income(4,633)(14,416)
Taxes on income283501
Net loss(4,916)(14,917)
Basic and diluted net loss per share  $ (0.83) $ (0.40)
Basic and diluted weighted-average shares used to compute net loss per share  6,945,274 37,508,624

The company doubled R&D Expenses, Selling & Marketing Expenses and tripled General & Adminstrative expenses in the quarter but managed to increase revenue by roughly 46% too. That's the good news. Problem is, the loss for the quarter was roughly 1/2 of the revenue. (Loss was $14.9m and revenue was 28.8m). 

Year to date, WIX stock has fell off a cliff. The company was trying to let insiders sell even more shares into the public markets, but had to sheepishly take that plan off the table, after the stock price started to slide. 

I said I would talk more about the "app market" - where Wix allows 3rd parties (like Google) allow functionality to Wix users through "apps" similar to what Wordpress users know as plugins. WIX company brass has stated that they'd like the app market revenue to reach 10% of total revenues - but when pressed on it, they don't seem to have a plan in place to make that happen. Take a look at this recent exchange on the Q1 conference call:
Source: Seeking Alpha
Bold Added By Me

Mark Mahaney - RBC Capital Markets
And the last question on the app market and the path to that reaching 10% of revenue at some point. Can you help us think through when we could see that? It sounds like that’s becoming big enough to maybe already impact some level of the ARPU and I understand that there are other packages, broader packages that were purchased and if we think about the Wix app market is the standalone business, how far we away from are we from that being 10% of total revenue?
Avishai Abrahami - Co-Founder, CEO and Chairman
I just want to add to what Lior stated, currently our priority is to actually provide as many applications that we can for free and while we assume that what we actually see and prudent from the data is that when we provide the those applications we actually get more subscribers going to premium and subscriptions and so we actually utilize the app market to encourage and enhance our convergent and converting this to premier subscriber. So that’s currently the current strategy we are thinking so it's kind of hard to differentiate between what the percentage will came from in the app because we know there to create total conversion and -- but I think (inaudible) already a large contribution to the overall performance of the Wix for the app market.
So the App Market isn't going to generate revenues for this company with that strategy. and here's why the Wix "freemium" model doesn't work:

Most investors are familiar with the 'freemium' model by now. Zynga and other game makers use the model because games are addicting & in order to feed your addiction ... you need to pay to play at some point. Unless you live in the heart of Silicon Valley, you probably know many more friends who play games online or on their phone - and probably only a few friends with a blog or website they update regularly. The percentages drop even further when you talk about friends who pay for a website each month/year.

Building a website is not for everyone. While working on a website can become addictive, using WIX's free website option will likely suit the majority of users. Facebook (or LinkedIN) tends to be what the blog was in the early 2000's - so many potential WIX customers could just use those free options. The average person only needs a website when they get married, or have a passion they feel like posting more about. Paying even a nominal fee of $4.99/month isn't something the average person wants to commit to, not to mention domain name & renewal fees. Small businesses need websites - but most will shop around before committing to WIX long term, other are doing well enough to pay someone to do most of the work for them - or they have an existing employee handle it.

The WIX business model is going to face the same challenges the freemium video game makers have faced. If you're a video game maker and a game gets popular, you might be forced to add levels, or upgrades in order to keep the users engaged. More timeless games like Tetris, or one of my personal favorites 2048 - are essentially a code base that isn't developed on much .... but typically game makers are forced to come up with something new. WIX is going to have to scale it's customer service (and IT) department as the number of paying users increase. Given that WIX marketing strategy & software is targeted to the 'do-it-yourself' newbie ... the company is likely going to attract lots of customers who have questions about how things work. By the looks of things, WIX isn't handling customer service very well, and that will only hurt the brand as it attempts to scale the business into profitability. While the businesses are different, the freemium model always relies on the next 'big hit' and in WIX's case, converting members to paying customers which as we already discussed - is not something a large number of people need or want to pay for.

There are other ways for WIX to make money.

They do have a rather large user base. Who knows how many are duplicate accounts, or spammy/porn type webmasters who are just using WIX because it's free backlinks - either way, WIX can make money with the type of users they have access to.

  • They could offer to setup the site like competitor does. Or offer a 'premium' tier of support that is actually decent.
  • They could display 3rd party ads on the websites that don't pay a monthly fee. This could actually work in converting existing members into paying users too. Think about it - if I have a free website and the only ads that appear are ads ... what do I care? However, if my competitors, or ads I don't like start showing up, it might convert me into a paying customer for that reason alone.
  • They could e-mail blast customers with offers considering a good percentage are probably entrepreneurs of some sort. 
  • Personally, I think WIX gives you too much free use of their proprietary software - I would make the free service level very basic, and force more users to pay. 
  • Lastly, WIX could license it's software to other providers like GoDaddy or Hostgator in order to expand the WIX brand beyond it's own capabilities.

For now, it appears management is content with a strategy that is essentially this:
  • Run TV and media ads to attract customers (free or pay)
  • Invest in IT and give the software away for free
  • Hope people want to pay for something other than the WIX software (like a domain or shopping cart)
  • Otherwise you use WIX for free
It's not a very creative business model, and by the look of the balance sheet - it's not generating any profits for investors. Personally I would steer clear of this company until the dust settles even further on what the strategy will be going forward.. Additionally, further insider selling will happen as other realize this company is miles away from being profitable. 

Disclosure - I hold no position in WIX and have never traded the stock. I wanted to short it in March when it was trading in the $30's but since the stock was so new, the options were not liquid enough. I may short this company in the future, but have no plans to do so in the next 72 hours.