Red Violet, a Rebutal
First, for those who lectured me so earnestly, and felt so sorry for me for being taken in, I made it clear in my statement that this was a 1.5% position for me, a frivolity. For example my portfolio rose yesterday from up 22.9% to up 26.4%, rising 2.8%, the rise in one day being almost double the size of my entire position in Red Violet. If my 1.5% position went to zero I’d hardly notice it in the big scheme of things. On the other hand, while it may go up and down like any other position, my guess is that the chance of it going to zero, is zero.
Second, I’m not trying to influence or convince anyone who doesn’t want to buy this stock to buy it. I’m just telling you what I did, and why.
Third, for a long time we’ve been bemoaning how there aren’t any SaaS companies coming to market at an EV/S of under 20, and with a market cap under $15 billion. We’ve also been talking about how much easier it is for a company with a market cap of $3 billion to triple than a company with a market cap of $20 billion or $30 billion.
Here, by an unusual set of circumstances we have a company which is a SaaS company, which has rapidly rising revenue, which has rapidly rising gross margins, which has rapidly rising numbers of customers, which has reached cash flow positive, which is approaching adjusted profitablility, and has a market cap of $0.3 billion ($300 million), which is only six times forward revenue. How easy will that be to triple. We’ll have to see, but certainly easier than a company with a maket cap of $3.0 billion or $30 billion.
Fourth. And this isn’t a private company that we are frozen out of. It isn’t penny stock: it sells at about $25 per share. It isn’t a pink sheet stock: it’s on the Nasdaq, for God’s sake! We can buy and sell it easily.
Fifth It’s also a company with experienced management, who probably know more about the field than anyone else having worked with the founder of the field on two previous companies. They have spent the last five years laying the foundation and putting in the fixed costs of acquiring the data and building their products and now new revenue goes almost 100% into gross margin.
Sixth I was astounded by the viciousness of the attack on this little company, by people who prided themselves on not having read what I spent considerable time compiling, and who weren’t attacking the company’s numbers or its field, but the fact that their headquarters was in a particular city. Now that’s a rational reason to stop reading about a company and attack it!!! Oh and also because someone they didn’t like had chosen to take a stockholder position in this, a public company.
Seventh How about looking at their revenue growth that TommyTripod collected for us?
Q1 2018 - 111.5%
Q2 2018 - 96.1%
Q3 2018 - 89.1%
Q4 2018 - 73.9%
Q1 2019 - 72.5%
Q2 2019 - 85.3%
Q3 2019 - 89.4%
Q4 2019 - reports March 5, 2020
You really don’t think that that is worth a look at, at 6x forward revenue.
EighthAnd their expanding Gross Margins
Q1 2018 - 39.3%
Q2 2018 - 46.7%
Q3 2018 - 48.8%
Q4 2018 - 51.1%
Q1 2019 - 53.5%
Q2 2019 - 57.9%
Q3 2019 - 62.2%
Q4 2019 - reports March 5, 2020
Management believes that gross margins will peak and stabilize in the 80-90% range once they achieve a $50 million run rate. That will probably be achieved within the next twelve months, as last quarter their revenue was $8.3 million up 89.4% from $4.4 million. $8.3 million is already a $33.2 million run rate and they grew last quarter by 89%.
Ninth And their Free Cash Flow figures (in millions)
Q1 2018: -2.8
Q2 2018: -2.4
Q3 2018: -1.6
Q4 2018: -1.2
Q1 2019: -1.2
Q2 2019: +0.1
Q3 2019: +1.5 (18% of revenue)
Q4 2019: - reports March 5, 2020
Putting all that together it sure looks to me that it’s worth a small position.
Tenth: How about the management team? I’ll quote from Tommy’s post:
“There are more reasons to like RDVT, beyond just their financial statements. The data fusion industry was essentially founded by a man named Hank Asher in 1992. Asher’s first data fusion business “DBT online” was bought out for $150M in 1999.
Immediately after being bought out, Asher teamed up with current CEO of RDVT Derek Dubner and current CIO of RDVT Jeff Dell to build a competing data fusion business called “Seisint”.
Seisint was acquired just 5 years later in 2004 for $775M.
After a 4 year hiatus, Asher began building another data fusion business called TLO “The Last One” with the current CEO of RDVT Derek Dubner, RDVT’s current President James Reilly, and RDVT’s current CFO Dan MacLachlan.
Unfortunately, Asher died suddenly in 2013, and because much of the TLO’s funding came from loans from Asher’s estate, it became a big complicated mess when his daughters got involved. The business ultimately was sold in bankruptcy court to TransUnion for $154M.
In 2014, the same team minus Asher regrouped and started a new business TBO “The Best One”, which was renamed to “Cogint”, then merged with “Fluent”, which was then was spun back out as Red Violet.
The point is this: The current RDVT management team is highly experience in this industry. I would go as far to say as their experience is unparalleled. They also clearly believe in the business, as insiders own 23% of the business. They also have plenty of experience in negotiating buy-outs, which I hypothesize will most likely be RDVT’s ultimate fate.”
Eleven As far as pumping the stock, they hardly even communicated with the public until their May stockholder letter, which I pleaded with you to read. They waited until they had reached the inflection point for the company. It’s still the only stockholder letter they’ve written. That doesn’t sound like pumping to me.
Twelve Does it have a moat? I’ll quote from that article I linked to.
“A question you might have now is: “if the market is so large and the economics are so attractive in this market, why don’t more tech companies copy them?” My discussions with management on this point suggest the core barriers to entry here are (1) there are only a handful of people on the planet that know how to build a robust and market-leading data fusion business and one of them – Ole Paulsen – is leading RDVT’s technical product development, and (2) nothing that RDVT has built thus far is off the shelf – they have literally built their own programming language for the product themselves. This creates an immense moat around their business. The only way a large competitor could reasonably enter this business without drawing a a ton of attention would be to buy RDVT outright.”
Instead of the “only way”, I would put it that buying RDVT would be the “easiest” way for a large company to enter the field.
Thirteen Okay, that’s my thinking. In my five part write-up, I summarized the last four earnings reports, linked to the stockholder letter, summarized and linked to the SA article, and summarized Tommy’s post. If you are interested, do your own evaluation. Don’t just follow what I did, because I don’t want to be responsidble for you.