four letters, one company, a Canadian small-cap, to be precise, but a possibly large (very large!) growth potential and a unique business model: RIWI Corp.
If you are not one of the investors who specialize in Canadian small caps, chances are that the company discussed in this research report is new to you.
Criteria that distinguish a “good” company…
As described on my website www.stock-market-research.com, I am looking for companies that meet the following criteria:
- Competitive advantages so that high margins and high returns on capital can be achieved
- Long growth runway, so that I can remain invested for a long time as a long-term investor and the compounding effect can develop in its full splendor
- I prefer companies whose business model is already profitable or at least shows a positive trend towards a tangible break even
- A clean balance sheet structure with little or no debt is also an important point that I pay attention to
- Asset-light business models with sufficiently large organic growth are often scalable and enable high cash generation
- Last but not least, I do not want to pay an astronomical price, but a reasonable one
… and RIWI fulfills
The company I am writing about today may well meet all these points. RIWI is a capital-light compounder with high operating leverage, scaling potential and, in its third year since commercialization, is generating returns on capital that other companies can only dream of:
- Return on Equity 27.9 %
- Return on Investment: 19.5 %
- Return on Assets: 25.6 %
- Return on Tangible Capital Employed: 102,4 %
The patented RDIT technology means a unique selling point and thus a moat that investors want to see in order to be able to earn many times their cost of capital in the future. Already today, the focus is on generating recurring revenues. The company is managed by the founder and CEO, who holds a high insider’s share in the company and can therefore be considered an owner-operator. The management gives the impression to the outside world that they are working hard every day to achieve the growth target of a 10-fold increase in sales by 2024 (!). Since the company does not have to spend Capex, free cash flow is almost equal to operating cash flow, which has historically been higher than EBITDA due to – admittedly somewhat dilutive – share-based payments. The growth (YTD: +53 % YoY) is financed entirely from operating cash flow. The business model is so cash-generative (since RIWI is partly paid in advance) that 75 % of the assets are cash. There is no bank debt. Although the equity capital still includes losses carried forward from the period before commercialization, the equity ratio as of June 30, 2020, is ~95.8 %.
You could jump on the bandwagon before the broad masses become aware of the company
Before you read on: As far as I know, the company has less than 20 employees and is perhaps only a – already profitable – start-up at this stage. RIWI has the opportunity to benefit significantly from the U.S. presidential election upcoming November. The third and fourth quarters are likely to be important for the company. Either the company will be lifted to a “new level”, or it will have to be admitted that the business model may not deliver such reliable results after all, as has been the case in the last two to three years. The investment is certainly associated with significant risks. However, in my opinion, it currently offers the opportunity to jump on the bandwagon early on, before it may be imitated by the great masses (and perhaps within a few weeks!).
What does the company do?
RIWI, which stands for “Real-time, Interactive, Worldwide, Intelligence”, is a global trend tracking and disruptive forecasting technology company with high barriers to entry in a market that is expected to continue to grow in the information age we live in.
The Company emerged as a think tank from a laboratory at the University of Toronto during the H1N1 pandemic in 2009 which is better known as swine flu. Commercialization did not occur until 2017, when the CEO and founder, Neil Seeman, gave up his university teaching, hired staff, and focused on revenue growth, recurring revenues, and profitability.
Using its patented Random Domain Intercept Technology (RDIT), RIWI can randomly intercept online survey respondents in almost any web-enabled country or region in the world. When a web user makes an input in their browser, they may mistype or click on a broken link to a non-commercial site. This happens several million times a day. RIWI can “intercept” this web user and instead of displaying an error message in the browser, RIWI can switch surveys. For this purpose, the company leases a large number of domains from domain brokers in advance, and if these domains are entered incorrectly, the surveys can be activated.
The reason why RIWI can provide such precise data
By using RDIT RIWI has the following advantages over other survey methods:
- Because only people who have landed on a RIWI survey page by the random act of a URL/IP input error can participate in the surveys, it is guaranteed that the surveys are conducted in a randomly selected sample of survey participants, which results in high data quality
- Participants take the survey voluntarily and, unlike panel surveys, are not incentivized, which also increases data quality
- RIWI can conduct surveys globally and reach individual countries or even cities. And this also in countries where the population groups are otherwise difficult to reach (e.g. Syria)
- The surveys can be switched practically in real time and thus provide an up-to-date picture of the mood of the population (extremely important!)
- Since the surveys can be conducted completely anonymously, surveys can also be conducted in countries where participants must be concerned that the government is monitoring them (e.g. Syria or China)
The survey data can be sold to a variety of customers
The data RIWI collects in this way is sold to customers in various sectors. These include large institutions that want to better understand certain trends in the population, but also financial institutions of all kinds that hope to gain information advantages, such as hedge funds or private equity.
A key predictor before commercialization (2017) was the prediction that Donald Trump would win the last U.S. presidential election, contrary to many other survey results that put Clinton ahead. I would like to come back to this in a moment, as the next U.S. presidential election in a few weeks may be an important milestone for the company’s further development. RIWI also correctly predicted the Brexit referendum. Examples for further “successes” can be found here. RIWI has its data quality regularly confirmed in peer reviews. This paves the way for new customer growth.
Quality features that distinguish RIWI
Capital light compounder with high operating leverage. The income statement is currently largely characterized by fixed costs of around US$ 2 million[i] p. a. Personnel expenses, the largest cost block, naturally, incur as step-fixed costs when the new sales staff is hired. On the one hand, data collected once can be sold to several customers, on the other hand, the margin is also scalable via the average “order value”. The sales costs and the data collection costs (i.e. mainly domain rentals) should not be directly linked to the respective order volumes. Any additional revenue will largely be reflected in earnings/cash flow, as marginal costs are close to zero. Accordingly,the EBIT margin has increased from -55 % in 2017 to +22 % in 2019 (1st half of 2020: ~+26 %). I doubt that this is already the end of the story.
Recurring revenue. Management is working to significantly increase recurring revenues. In 2019, 50% of revenues were already recurring and 40 % were based on a long-term contract (at least 6 months). In July, Bank of America renewed a 3-year contract.
Growth potential. The company sees potential to increase revenues to US$ 30 million by 2024. At US$ 3.1 million in 2019, this translates into a growth rate of 57% p.a. According to the CEO, the demand for data collection has exploded in recent years and is still in its infancy. The communicated growth target of a tenfold increase in sales is of course an ambitious goal within 4 years. But the signal effect, which chances result from the business model, is in my opinion more important.
Database. Perhaps not quite as valuable today, but with increasing “filling” RIWI is building up a knowledge database that will probably be valuable. This purely intangible value has not been capitalized in the balance sheet to date. Hidden reserves are likely to build up over time, as RIWI will be able to access historical data in the future and thus compare future patterns and sentiment data with historical data. I do not assume that everyone who buys RIWI shares today already has this on their screens.
High insider participation. RIWI was founded as a think tank by the current CEO Neil Seeman in 2009. Over the years he has focused more and more on making RIWI a “proper” company. The CEO, for example, holds 35 % of the company, all 13 directors/executive officers hold 57 % according to the proxy statement. The CEO in particular seems to have identified strongly with the company. Without ever having spoken to him, I would say that he is an owner-operator. Especially in the early phase of the company, in which the company admittedly still is, the jockey is sometimes more important than the horse! On YouTube and the company’s homepage, you can find some videos of conferences or lectures. Get your image of the company’s CEO!
Tailwind. Although the company is not a direct winner through COVID-19, new sales potentials have arisen through data collection in this context. A contract for more than US$ 1 million could be signed to collect data regarding COVID-19 in 16 countries. Revenues were increased by >100 % in Q1/2020. It is not known, however, how much of this is specifically attributable to sales as a result of the pandemic.
Fundamental data & scalability. If I am honest, RIWI has a balance sheet that I have never seen before with any other company and did not think it was possible. The company is debt-free. The equity ratio at the end of Q2/2020 is 95.8 %. On the assets side, there is ~75% cash at the end of Q2/2020. If receivables and unbilled revenues are also included, the ratio is ~90 %. Fixed assets consist of a few computers and fixtures in the rented office as well as the patent, the domain name, the trademark “Riwi” and the capitalized costs for the company’s website: All in all the fixed assets are at US$ 100k, plus US$ 146k right-of-use assets from IFRS-16 accounting for the rented office.
The free cash flow corresponds in principle to the operating cash flow, as there is practically no Capex. Operating cash flow, in turn, has historically been significantly higher than EBITDA as the Company had approximately US$ 0.5 million of non-cash share-based payment expenses (which will be lower in the future to minimize dilution). The directors all received no salaries but stock options until the change in the compensation system in Q2/2020. Revenues increased by US$ 440,000 in 2019 and OPEX (adjusted for share-based payment expenses) increased by only US$ 14,000. This shows how scalable the business model is. Just one year after commercialization, RIWI already operated at a profit in 2018. The current strategy is to invest its resources in sales and thus further growth. This year, five new sales representatives have already been hired.
Currently an exciting situation. As already explained, Q3 and Q4 could be very important for RIWI by laying the foundation for further growth. Here, several effects come together:
- The new staff hired in Q1/2020 should slowly be trained in such a way that this leads to first revenues
- According to the Q2/2020 figures published at the end of July, the recognition of some revenues was delayed as some clients needed to adjust their security business protocols in a work-from-home environment due to COVID-19. This should shift revenues from Q2 to Q3. An order of magnitude was not mentioned, but I would conclude that it is not only about a few thousand US$ because otherwise, it would probably not have been necessary to provide this information.
- Then there is the U.S. presidential election, which can act as a catalyst. Since September 1st, 2020 RIWI has been collecting current survey data daily and selling it in the form of 3 packages to customers such as hedge funds or private equity companies. This is a win-win situation. For customers, an estimated (!) US$ 50,000 expenditure is nothing compared to the profit that could be achieved by placing their billions of assets under management correctly using the data. And for RIWI, every additional customer is revenue and pure profit, because the marginal costs are merely sales costs since the data is collected anyway. If you succeed in selling to (only?) 20 customers, an additional turnover of US$ 1 million is possible. This, in combination with the “normal” organic sales growth and the shifts during the year, would lead to a noticeable jump in sales, show the capital market that the business model also works in the “king’s class” and pave the way for winning new customers. After all, those who correctly and reliably predict the US election have proven that they have a functioning system that can be used in other areas (with the possibility that some of the customers won here will remain loyal to the company). For a few days/weeks RIWI has been listing the third office outside of Canada on its homepage. Now guess where that is. It’s in London! I would be inclined to say that the office is related to sales activities for the election package they sell, because where in Europe do you find more potential customers than in London? RIWI presented itself at the LD 500 Virtual Conference on September 1, 2020. Although it was said there that no sales representative was physically present in this office, I can’t help thinking that the new location might not be used as a sales base after all.
It could be a good time to enter the stock now, (a) to be surprised by positive Q3 and Q4/2020 numbers, and/or (2) to take advantage of current prices to invest in the company with a long-term time horizon. On the one hand, RIWI is generally still flying under the radar of many market participants, but on the other hand, I also believe that the short-term sales potential of the U.S. presidential election is not yet reflected in the share price.
At this point, I would like to point out again that RIWI is only a profitable start-up, but the historical financial data since the commercialization is not a reliable track record to draw conclusions about future developments. Perhaps my considerations about the impact of the U.S. presidential election package are also wrong or I overestimate the potential. Also, to be considered is the scenario in which RIWI wins, gains many customers, and generates correspondingly high revenues, but the RDIT technology then fails and produces the wrong prediction of the outcome of the election. This would be anything but good for the company’s reputation.
If the best-case scenario I have sketched out should occur, people will say in amazement: “All points were open on the table”!
Back of the napkin valuation. As of 30.06., approx. 18 million shares are outstanding. At a closing price of CA$ 3.55 (approx. US$ 2.55), this results in a market capitalization of US$ 49.8 million. Deducting cash of US$ 3.7 million results in an Enterprise Value (EV) of approx. US$ 46.1 million. Trailing twelve-month sales are at US$ 3.9 million. The EV/turnover is thus 11.8, which at first glance contradicts my criteria that I do not want to pay astronomical valuations. Moreover, such a multiple is always just a snapshot. If the softer factors such as the business model with the moat are taken into account, such a multiple seems to be more appropriate again in connection with the high growth rates. The TTM-EAT is US$ 1.45 million. Relative to the EV, this is a multiple of 32. Again, this is not expensive for a company that is growing at 50 – 100 % and implies scaling potential. Accordingly, the price/earnings-to-growth ratio (PEG) is below 1.
A back of the napkin DCF model for the “guidance scenario” (sales 2024 = US$ 30 million) under the assumption that the ratio of free cash flow to sales increases from 37 % to a maximum of 50 % is shown below. Especially the transition to the Terminal Value (TV) at 2 % is of course very flat-rate compared to the previous growth rates, but at first glance, it already shows how things could turn out.
One could also consider the following: If the business model is sustainably established and RIWI achieves a turnover of 100 million US$ annually in 10 – 15 years, it is hardly imaginable that the shares would not then already be listed on the NASDAQ. A turnover multiple of 10 would probably not be exaggerated so that a market capitalization of US$ 1 billion could be justified in the long term. From the current price level, this would be a 20-bagger. Of course, this is still a long way off.
[i] The Company is based in Canada but reports in US$
Author’s ownership disclosure: At the time of publishing this research report I hold shares in RIWI, Corp.