Summary
- Revenues rose sequentially in Q3 but gross margins actually fell.
- Management believes the company will get to a cash-flow breakeven point by year's end.
- Negative equity and the company's high debt load continue to bring plenty of risk to this play.
Intro
We initially wrote about Inseego Corp. ( INSG ) in October 2020 and then followed up with further commentary in October of last year. In both articles, we were very mindful of the downside risk in INSG stock. In fact, in late 2020, we went short the stock (At approximately $8 a share) only to see shares rally up to $20 a share by February 2021. Suffice it to say, we quickly bought back the shares once we saw a trending move develop. The irony of it all was that the February 2021 top ended up being a multi-year high for Inseego as all we have seen since then has been an aggressive downward trend of lower highs and lower lows as we see below.
Q3 Earnings
The question now is whether prices have dropped far enough to finally ignite some type of sustained rally to the upside (The present share price is a mere $0.88 per share). The CEO on the recent third-quarter earnings call focused most of his attention on the fact that he believed the company would turn cash-flow positive in the not-too-distant future. There is no doubt that internally generated cash flow would help the company's fortunes significantly. In fact, the consistent lack of positive cash-flow generation (Which resulted in multiple equity raises) was one of the reasons why we shorted this stock in the first place.
The CEO's confidence stems from the impressive sales growth (Sales grew by $7.3 million to come in at $69.2 million in Q3), particularly in 5G which now makes up almost half of the company's total sales. Another encouraging trend in Q3 was in the enterprise FWA business which continues to grow and deliver higher margins for the company to boot. The growth of FWA remains key in that Inseego's carrier partners only of late are ratcheting up their services in this space. This trend along with how costs have been eked out of Inseego's business in recent times bodes well for improving earnings and cash-flow growth going forward.
Negative Shareholder Equity
However, if we gave Inseego the benefit of the doubt by stating that the company is generating positive operating cash flow and earnings today, the question then becomes if the company would be a viable long-investment at this juncture. If this was the case, Inseego's price-to-earnings ratio as well as its price to cash would bounce into positive territory which may be enough for bottomfeeders (who expect a snapback rally in the stock) to get long this name. Furthermore, to add to the long argument here, shares of Inseego presently trade with a forward sales multiple of 0.37 which definitely is a cheap multiple compared to the industry at large.
However, besides sales growth, the other driver of earnings and cash flow is the company's assets which unfortunately for Inseego remained in negative territory (-$55+ million) at the end of the company's most recent third quarter. Assets are the roots that birth the tree (When it comes to earnings and cash-flow growth) so the more assets (and book value) we can take hold of in an investment, the more earnings and cash flow we can earn, in the long run, all things remaining equal.
In many of our beaten-down value plays, we like to buy these companies under book value (Shareholder equity exceeding the market cap of the company). We do this because it gives us a margin of safety in the investment in that if the respective company was liquidated there and then, the company would still have some intrinsic value (Assets would outweigh liabilities in value).
In Inseego's case with its present (-$55+ million) equity, the company's liabilities surpass its assets but the market cap of the company still comes in at almost $95 million. Therefore, we would not be receiving any margin of safety on the assets side due to the negative equity in the company. The other negative trend here from a long-term standpoint is the company's rising debt load. Long-term debt of $161+ million is also significant in that if forward-looking earnings expectations do not come over time as envisioned, cash-flow generation would be adversely affected as a result.
Conclusion
To sum up, Inseego's current valuation is based on its sales more or less doubling over the next 4 years. This expectation is a result of aggressive product development to match demand in the FWA solutions space as well as 5G fixed wireless access. However, the company with its high debt load and lack of shareholder equity remains a high-risk investment especially if growth rates do not come in as envisioned. Let's see what the company's Q4 numbers bring. We look forward to continued coverage.
For further details see:
Inseego: Still Not Buying At These Prices, Awaiting Q4 Results