Micro Cap Idea: TPNL

Hey everyone! :blush:

I know micro caps aren’t talked about much here but I recently found an interesting one.

[I originally posted this on my site but thought I’d share it here as well.]

Anyway…

Name: 3PEA International
Ticker: TPNL
Market Cap: $141 million

The business: The company makes money working with plasma donation centers by selling pre-paid debit cards.

So people donate plasma and actually get paid for it. Usually about $40. These plasma donation centers need to compensate donors so they give them these pre-paid debit cards. This is where 3PEA comes in. It works with the donation centers to set up the card programs and infrastructure to service the donors.

It’s pretty niche but that’s key to its competitive advantage. Competition is inept.

Competition: The biggest competitor is Wirecard who, five years ago, had 100% market share. Now, 3PEA has over 35%. Wirecard has dropped the ball and is losing ground quickly.

Financials: The company was recently uplisted to the NASDAQ so it does not have all the quarterly financials of past years.

However, here are the last three quarterly revenue numbers:
44%, 60%, 62%, and 44% for Q4 guidance

Gross margins: hovering around 50%

Operating cash flow margins: about 20% (called adjusted ebitda but it is basically OCF)

Management: The co-founders own 40% of shares outstanding. Have been running the business for about 17 years. A lot of experience.

From here on: A few catalysts loom on the horizon. One, the company has really boosted its investor relations presence. This is surprisingly important for micro cap companies.

Two, it is expanding into more lines of business. Pharma-copay and clinical research are areas of focus. Instead of only plasma, these cards could be used to reimburse patients in clinical research experiments. On top of this, these cards could also be used for general purpose reloading. This means people could re-load money onto them rather than from only the donation centers. This would really open up the market.

Interestingly, pre-paid debit cards are a huge and growing market.

Some stats:https://aitegroup.com/report/us-prepaid-card-market-overview…

Growing about 15% and expected to get to almost $580 billion by 2020.

Valuation:
TTM revenue are $21 million.
Enterprise value is about $141 million but it also has $20 million in float from the un-used card balances that it can make interest off of.

I think sales can grow 40% for next year so that could get us to about $30 million in forward revenues. So a 4.7x forward EV/sales multiple. For a company that posted 60% growth with positive net income and pretty solid operating cash flow margins.

That’s the thing with micro caps. They trade for a discount because not many institutions can even buy them. Therein lies the structural advantage of a micro cap investor. A tad outside my comfort zone but an interesting company nonetheless.

Conclusion:
This is still a solid deal even though the stock has appreciated heavily over the last year. It is down a bit since this pullback so it could be a time to nibble.

I am really liking this one. I haven’t invested in any micro caps in a long time so I’m approaching it cautiously.

Anyway, just wanted to let you all know. Feel free to shoot holes. I’d like that.

References:
Annual Report: https://s3.amazonaws.com/filings.irdirect.net/data/1496443/0…
Investor Presentation: https://3pea.com/wp-content/uploads/2018/12/3PEA-Investor-Pr…
Latest reported quarter: https://seekingalpha.com/pr/17331810-correcting-replacing-3p…

Best to all and Happy Holidays,

Fish

19 Likes

Financials: The company was recently uplisted to the NASDAQ so it does not have all the quarterly financials of past years.

Looks like they have Form 10Q’s going back 5+ years on sec.gov.

Even if they were uplisted to nasdaq recently, if they were publicly traded OTC etc previously, they would have still been doing the public filings, as it appears they were

-mekong

2 Likes

The earliest SEC filing I found is September 2010. I’m wary of reverse mergers

Overview

We were originally incorporated in Nevada as G.K.W., Inc. on August 24, 1995. We changed our name to Antek International, Inc. on July 1, 1996 and operated as a distributor of private-label revolutionary coatings for graffiti and corrosion resistance. Antek’s products consisted of environmentally-friendly coatings which formed a thick, impenetrable layer that encapsulate rust and were extremely pliant to prevent damage from wind, water, weathering, UV rays and graffiti. We went public in 1998. We changed our name to Tika Corporation on October 12, 2005, after which we focused our business on financial management services. We acquired 3Pea Technologies, Inc., a payment solutions company, in March 2006, which resulted in 3Pea Technologies, Inc. becoming our wholly owned subsidiary. We changed our name to Paypad Inc. on March 13, 2006. On October 19, 2006 we changed our name to 3PEA International, Inc. In 2007 we acquired control of Wow Technologies, Inc., a payment solutions company with a proprietary card processing platform, in a share exchange agreement whereby Wow Technologies, Inc. became our majority-owned subsidiary.

http://secfilings.nasdaq.com/filingFrameset.asp?FilingID=746…

More SEC filings https://www.nasdaq.com/symbol/tpnl/sec-filings

Denny Schlesinger

5 Likes

Hi Fish,
I am trying to wrap my head around the moat that TPNL has. If I understand this correctly, TPNL is providing cash cards as reimbursement to people who sell plasma and, possibly, people who participate in clinical trials. What makes TPNL’s cash card special? Why can’t my local blood center give out Amazon gift cards or Square Cash Cards? What keeps other out? What makes TPNL’s competition inept? How did TPNL capture so much market share this year?

What’s TPNL’s secret sauce?

Best,

bulwnkl

15 Likes

The company was recently uplisted to the NASDAQ so it does not have all the quarterly financials of past years.

Their previous financials are on their investor relations site: https://3pea.com/investor-relations/sec-filings/

3pea’s market cap is 150m. Let’s think about whether that’s a good price or not.

Its TTM revenue is 21m…well MDB and ZS are about 10 times that. They’re $4b+ companies, so with very rough math we can divide by 10 and get 400m (roughly 1/10th of the valuation they have now, since 21m would be 1/10th of the revenue they have).

400m sounds good. But if they were at 21m of revenue, they wouldn’t have the track record of growing the businesses to a much larger scale, so let’s cut that in half and say 200m would be more reasonable since there’s a lot more doubt in a company 1/10th of the size. And that’s for MDB or ZS…but 3pea isn’t SaaS, so let’s cut that in half again and say 100m. But also, a 50% gross margin isn’t the same as 70% or 80%, and software and network might provide other advantages. So maybe 3pea should only be worth about 50m.

So maybe at 150m it’s crazy expensive. Or maybe my back-of-the-napkin math is worth exactly what you paid for it. But the real point is, you’re not getting a business that is CLEARLY worth significantly more than (maybe multiples of) 150m. So why mess with a penny stock?

Penny Stocks
Stocks with tiny market caps are risky for a number of reasons:

  1. Generally there is little analyst coverage, so there may be unknown, unexposed dangers lurking that we aren’t privy to.
  2. The smaller the market cap, the easier the stock can be subject to manipulation (pump and dump schemes etc).
  3. Even if the business does well, small market cap stocks often fluctuate wildly. This can be fine if you have a very small allocation, but not if it causes anxiety and worse, panic selling.

Caveat emptor.

Bear

21 Likes

There’s a write up of TPNL on Value Investor’s club:
https://valueinvestorsclub.com/idea/3PEA_International_Inc./…

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Why? Why?

Want to know when a market has topped and is not coming back? When you have to start looking for things such as penny stocks, or as recently asked yesterday, “anyone know any data or SaaS company that has not gone up”, i.e. a hidden gem?

If what is the best quality of companies is no longer worth investing in, and you have to look elsewhere like a penny stock, or ask the above paraphrased question, then it is time to get out of the market.

Fortunately, I do not see that being reality. However, it appears that such conversations are starting on Saul’s board. Why? I will tell you why. Everyone wants to relive past glories, and they want it now, now, now, now.

Well, investing does not work that way.

You want to invest in a penny stock, good luck. Because that is what is required, luck. There is no amount of information that you can obtain that will make a penny stock anything but luck. Nothing.

And as to the latter request, if there is a great SaaS or data company whose stock has somehow been overlooked and is “cheap” you are fooling yourself. The market is too efficient. If there is such a stock, and look how “cheap” it is, there is a real reason why the market has chosen not to include it in the rally. Your money however, your investing. Good luck. Perhaps you may have some, but that is not an investing strategy I want any part of.

Tinker

20 Likes

And as to the latter request, if there is a great SaaS or data company whose stock has somehow been overlooked and is “cheap” you are fooling yourself. The market is too efficient. If there is such a stock, and look how “cheap” it is, there is a real reason why the market has chosen not to include it in the rally.

TWLO last year? I think NTNX falls into the category of companies, like TWLO, a year ago that are mispriced. Or is there another unknown reason why NTNX’s valuation is so low? My bets are placed on it being mispriced.

Chris

2 Likes

Hi Fish,

Thanks for bringing this to the board. To everyone that is generalizing on this company because it is a Microcap, I think you are being unfair. This is Saul’s board and he has invested in Microcaps before, Also, while Saul is invested in SaaS stocks at this time, this is not just a SaaS board.

If you read Ruleno1’s post there is a nice write up on the company that gives a lot of information on the company that forward’s the conversation.
https://discussion.fool.com/there39s-a-write-up-of-tpnl-on-value…

Don’t believe that the market is efficient, if it was we wouldn’t have large swings in the market like we have experienced lately.

I want to encourage anyone who has a company growing revenues over 30% or better to feel free to post your ideas on this board. I know I want to hear about them.

Thank you,
Andy

22 Likes

…while Saul is invested in SaaS stocks at this time, this is not just a SaaS board… I want to encourage anyone who has a company growing revenues over 30% or better to feel free to post your ideas on this board. I know I want to hear about them.

I’m with Andy on this.

Saul

6 Likes

I am not saying not discuss it. Discuss whatever is of interest. I am saying, why? In the context of a risk/reward basis. Also in the context of what I have experienced in regard to when markets really crash for good.

In this circumstance, I simply have to ask why?

Each to their own.

Tinker

6 Likes

Hi Tinker,

In this circumstance, I simply have to ask why?

To broaden the discussion so that we are not just watching one business model. In case the SaaS market falls so we know where might be a great place to pivot. To keep people from being focused on just the SaaS model so we can maybe find other trends in the market and to just allow more people to participate on this board so that we can always have fresh ideas to determine whether we would like to invest in them or not.

Andy

24 Likes

In this circumstance, I simply have to ask why?

Each to their own.

Over the years I have speculated with penny stocks. Not just any penny stocks but ones whose business model seemed like a sound idea. These included a medical robot (RBOT) that lost out to Intuitive Surgical (ISRG), several alternative energy stocks, and a Chinese electric car, Kandi (KNDI). None of them made the big time, some went under. By using a trading method (buy on dips, sell on rises) and options where available I made money on some, lost on others but I made lots of money on KNDI getting a 43% CAGR over four and a half years.

It was an interesting experiment but one I would not recommend to someone building a retirement nest. Why did I do it? Because in addition to making money I wanted to learn as much as I could about the market. If your principal objective is to build the eggs nest, stay away from investing in penny stocks. On the other hand, knowing how to do it, TRADING penny stocks can be quite profitable.

After reading the TPNL writeup I’m tempted to speculate with this stock. Clearly it is not a mainline business, VISA got out of it. But it is a curious poor man’s niche. Who would want to sell his blood but a poor man? It reminded me of a science fiction novel where convicts are harvested for transplants. It turns nasty! Since this business is voluntary I’m not the one to judge it. But getting back to the investment thesis, finance – credit risk free finance – is a terrific business. I’m long VISA (V). It held up much better than my high tech stocks becoming my largest position.

Denny Schlesinger

5 Likes

https://valueinvestorsclub.com/idea/3PEA_International_Inc./…

That report came out in July. The price action since is textbook pump and dump. I am not accusing or assuming anything. Just seeing something and saying something.

I certainly appreciate anyone bringing a growth company to the board. Pluralsight, Grubhub, Anaplan, and others have interested me. I don’t remember who brought Smartsheet back recently, but I just bought some shares in December. So thanks.

I’m just saying that in this case I don’t see a favorable risk/reward.

Bear

2 Likes

That report came out in July. The price action since is textbook pump and dump. I am not accusing or assuming anything. Just seeing something and saying something.

I don’t see it

https://www.nasdaq.com/symbol/tpnl/stock-chart?intraday=off&…

Denny Schlesinger

1 Like

Thanks for the great questions bulwnkl. I asked a friend who knows this name better than me and the content below is from him.

Here are a few things on the special sauce:

"1) Regulation-- there are very strict laws surrounding who is allowed to donate plasma and how much. TPNL’s payments are deeply ingrained in the DMS (donor management systems) that make sure these regulations are followed.

  1. Experience-- TPNL helps run loyalty programs/promotions and has many years of experience working with and helping the donor centers run efficient plasma programs. They are at a point now where they can analyze customer experience by location by hour and deliver unique insights to centers. You can’t get that level of insight overnight.

  2. Incentives-- The big 3 companies that control the majority of plasma centers do not care about price very much because they aren’t paying (the customers are). They care about reliable service. Hard to beat incumbents who are delivering on service."

As to the competition:

"Wirecard’s technology is outdated. And it is a pretty niche market that is not THAT large, so it is not top priority either. If donations are not working even for an hour, that can be a big disruption because customers are understandably pissed off if they have a needle stuck in their arm for an hour and then can’t get paid the $40 they are owed immediately (and probably really need).

Botton line IMO is that sure, Paypal or other large tech companies COULD get into the market from a tech perspective if they really wanted to. But they’d have to invest money upfront, it’d be hard to get contracts (most service contracts are 3-5 years anyways with auto renewals), and there would be no real gain for them-- dollars are small."

Hope that helps.

4 Likes

Hey Bear,

I hear you on the risks in micro caps but like Denny has pointed out, I’m trying to broaden my circle of competence.

A few notes:

  • Just because this is not software doesn’t mean there aren’t other advantages. For instance, this business seems to have very high switching costs for donation centers.

  • If we’re talking about gross margins, they aren’t far off from Twilio and the valuation is nowhere near that.

  • No analyst coverage means there is more room for mispricing IMO.

  • With the NASDAQ uplisting, pump and dump is not as likely. Plus, more than 50% of shares are owned by management

  • Volatility is not risk.

Thanks for the points you bring up!

Best,
Fish

3 Likes

Good find RuleNo1. Very helpful.

As to ‘why’ Tinker, just like you I’m trying to find the very best risk/reward scenarios.

I’m not going to have this as my biggest position but why not look into a fast growing company with a sizable moat that is trading at a discount compared to some of the stocks we follow? However, TPNL is not traditionally “cheap” as you like to look for.

I view the skepticism here actually as a positive. To me, it means a lot of smart investors wouldn’t touch it for structural “stigma” reasons and so there is a probably a good chance that it is mispriced.

I’m just here to share some of my research.

Very best,
Fish

5 Likes

In case the SaaS market falls so we know where might be a great place to pivot.

That is exactly my point. By the time higher quality companies become too expensive or not considered to be good investments, then people turn to try to find other “opportunities” and as they do so they turn to lesser and lesser quality companies.

There have to be better quality companies that are not SaaS that make for much better risk/reward investing.

We are talking blood plasma donors here, if I caught on correctly. We are also talking small money. Where do you go to get to “big” money? How do you know when it is not a pump and dump?

My first job out of law school involves a company with multiple penny stock operations. They were really just shells in the end to make it more easy to get and raise money on the public markets with having to go through the expense and legal liability of an actual IPO.

The information that you read on them has zero credibility. There is no way of knowing who is pumping, who is dumping, and when real mews is coming out.

The reason for this, given how small these companies are, who out there has any incentive to spend time and money OBJECTIVELY analyzing and reporting on these stocks. ANSWER: no one. Those who cover, or those who write about them, almost to the last person, are paid, or have some personal financial interest in their activities surrounding the penny stock.

Occasionally you get lucky. I guess Oracle, as an example, was once a penny stock. It happens. But that is why I said it is luck - nothing more, if you make out like bandits, unless you actually run the business or are an insider and know what is really going on, for yourself. Because you cannot trust insiders in the company otherwise to look out after your pecuniary interests.

But to conclude, that makes my point. When you toss off the world of stocks that are out there that are not penny stocks, and decide that the penny stock is the best place to commit your time, resources and money…that often indicates there is little else out there and we are trying to dig the last moss out from under a rock, just so we can keep the party going.

Fortunately, I don’t see that happening here. I see many undervalued stocks at this point in time, Many great quality businesses one can invest in without having to resort to a penny stock, any penny stock, does not matter.

But others may have skills or knowledge or experience otherwise, more power to them. I am stating my experience as someone who wants to keep his money, and make a good return. In my mind penny stocks are all long-shots requiring luck, and that is a longer shot than playing earnings for short-term swings.

I appreciate counter-opinions to the contrary. As that is a discussion and we can all make up our own dang minds. For me, penny stock - why? When there are so many places to invest. For others, penny stock (this one is different and we can make out big! and it is a better opportunity than those other places to invest).

Tinker

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