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??

Yikes!

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.

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