Apple didn’t release the Tracker today! That’s great news although they laid the groundwork for it. This possibility was listed as the #1 risk to the bear trade-around-a-core position noted below. My trade plan was well executed ; risk-off going into the event and immediately went risk-on, buying back some of my core position at a lower price at the end of the Apple event when it become clear the tracker would not be announced this year. Apple’s tracker is at least another year away so I expect less risk to multiple compression in the coming year although risks like this should be monitored closely.
I want to make it clear, never did I think Apple’s entry would be a risk to SMSI earnings… only to the multiple the street would reward them because the headlines of an Apple entry would loom over the heads of certain investors as a reminder of the types of risks SMSI may face in the future. Not necessarily would Apple’s tracker be competition (and infact, my esteemed colleague, Joshua Kim, did a deep dive into today’s announced new Apple chip and he provided compelling evidence why it would not be) but it would serve as a reminder that SMSI has historically been a cyclical company prone to busts after their booms because of new technology introductions by competitors.
As far as I’m concerned, SMSI now has the all-clear for the next 12 months but I do question what multiple they will receive due to their history. I also have some modest concerns about Q3 earnings but it’s a problem which has already been solved and will lead to explosive earnings growth in Q4.
Til next time!
Hi! As many of you know, I’m the founder of StoryTrading and I’ve been involved with SMSI since I rotated out of HMNY last year. My position in SMSI started at under $2 and I added over time as our collaborative research in our SMSI Research Group revealed important nuggets which gave our group a heads up on the company’s success. Over time, my investment dollars came to represent 20% of my portfolio – the maximum I target per stock – much of this position used leverage with $1 and $2 calls so after the recent move to $6+, the stock ballooned to 50% of my portfolio. Despite the big move, I was not planning on selling any shares or calls as our internal operating models shared by several group participants indicate SMSI could generate $0.70 to $0.90 EPS in 2020 and that’s WITHOUT any additional large customers.
So what changed?
This past weekend, a link was shared in our research group to https://www.theverge.com/2019/8/30/20841204/ios13-code-apple-tile-location-tracking-tag-find-my-app discussing how Apple may next week announce a competing Tracker device. For reference, SMSI supplies the software for the Sprint Tracker by Coolpad. You can read more about the key nuggets our group discovered here. The above link didn’t result in much discussion in our chat room but if you follow the link back to https://9to5mac.com/2019/06/04/ios-13-tag-device/ and then https://9to5mac.com/2019/04/17/find-my-iphone-revamp/ you will come across the following passage:
I wasn’t worried until I read this passage. The technology as described seems potentially disruptive to me. By using the network of all iPhones, lost items can be tracked without a cellular connection which I imagine means a smaller device with longer-lasting batteries. Those who have tried the Sprint Tracker know that battery life is a key issue. Also, since no cellular connection is needed, Apple could potentially give this service away for free (with purchase of the trackers) or for a very low monthly fee.
One of the bear theses, is that SMSI’s products are not terribly innovative and proprietary and as soon as something becomes successful, Apple and/or Google can replicate it in their OS. This potential tracker launch which may be announced on September 10th lends credence to this argument. That has historically played out with SMSI as can be seen in the market cap chart below as new technologies quickly replaced products or services SMSI was offering shortly after they became a success.
I believe this is a real issue which can impact investor sentiment and question the sustainability of earnings and thus the price multiple the street will be willing to award SMSI. Additionally, there has been a view that as IoT products like tracker become smaller, better, and more ubiquitous, SMSI will be there to benefit. But will they? Maybe it’s Apple and Google which will benefit instead.
Make no mistake, I am still bullish on SMSI in the intermediate-term and it STILL represents my largest allocated position and largest position ever but I’ve taken this opportunity to make a few adjustments to my positioning and potentially take advantage of a September 10th Tracker announcement by Apple. Here’s what I’ve done:
1. sold off some of my $1 and $2 October DITM calls and pocketed the cash rather than re-investing further out
2. bought a few September $5 puts paid for by selling a few September $7 calls
3. bought October $5 puts
If I am right, the stock could see a sharp correction if Apple goes through with this announcement on September 10th. Now, this is very important to understand… I was at 50% allocation so this catalyst was largely just an excuse for me to be more prudent with my allocation. Also, please read below, why this trade idea may NOT WORK:
WHY THIS COULD BE THE WRONG TRADE…
- Apple may not announce a tracker next Tuesday. I am trusting news reports that coders see this in the code base. It’s also possible Apple may simply delay or nix the offering if they have some sort of roadblock.
- SMSI can announce a new customer ANY DAY instantly inflating the value of the stock.
- SMSI could get new analyst coverage ANY DAY.
- Most of SMSI’s revenue comes from Android phones not Apple phones.
- Tracker is a recent launch anyway and did not impact last quarter’s blow-out results appreciably.
- SMSI now has a 3rd leg in ViewSpot – a product which cannot be easily re-produced by Apple or Google. Infact, I see ViewSpot as a dark horse here which can become much more valuable to the company in the long-term than SafePath is. SMSI recently launched a counter for ViewSpot which shows total # of devices activated. This is a signal to me that ViewSpot is about to grow very quickly and a new customer announcement may be imminent. Go to https://www.smithmicro.com/viewspot/ and scroll to the bottom to see it.
All above are valid arguments for dismissing this trade idea, however, I believe investor sentiment may be harmed by this and as stated above, lends credence to some bear concerns which could keep multiples down. As my position is still extremely net long even with the trades referenced above already made, my positioning here can be seen as merely a hedge on an overweight position but I also do want to take advantage of a negative market reaction if Apple does announce their tracker on Tuesday. If the stock gets hammered too hard on Tuesday, it also could provide a buying opportunity.
All in all, I personally benefit much more if SMSI skyrockets throughout the next week and this represents a trade around my core but I’m glad I’ve found a reason to reduce my core position as 50% allocation was too high. It will be interesting how the market views the sustainability of SMSI earnings and consequently the PE ratio which will be awarded.
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