The Long: Petmed Express Inc. (PETS)
Recent price: $ 37
PetMed Express, Inc. (PetMed Express), also known as 1800PetMeds, is a integrated leading pet pharmacy. The Company sells the full gamut of pet medications and health products direct to the consumer. It offers approximately 3,000 SKU’s including market leading brands such as Frontline , Advantix II, and Heartgard Plus. It also offers pet supplies on its Website, and outsources delivery and fulfillment which are drop shipped to its customers by third parties.
Spending on pets was a high growth pursuit with sales growing 10.7% in 2016 , over five times US GDP. Petmed Express is well positioned as a specialty online retailer in a near $5 billion market for pet medication in the US alone. As the small-cap , valued at less than $1 billion, Petmed Express has considerable upside until it becomes a viable take over candidate for Amazon (AMZN), which is seeking to domineer and conquer the US retailing marketplace. A trend that does not bode favorably for job creation.
- PETS has a recent history of beating earnings estimates, followed by favorable price momentum
- PETS analysts raised EPS estimates again. PETS has a very high analysts revision factor score. All four analysts have increased estimates within the last thirty days.
- PETS has above avg core fundamental margins: generating net margins nearly 6 times the industry average.
- PETS is undervalued relative to its peer group based on the next twelve months earnings estimates by analysts. At 25.6x vs 37.8x
Meanwhile, Short interest has grown to a relatively high level of over 20% of the float. This could provide further tinder to upside as shorts feel the heat when the stock trades higher. We believe fair value based on our fundamental research is $47 *per share.
*Model valuation assumptions : $1.50 ttm eps, 5yr estimated cagr 15%, 25xpe, 10% discount rate for small cap risk .
12- 18 month target price: $47
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The Short: SNAP Inc. (SNAP)
Current price: $15
Snap, formerly Snapchat, is a mass phenomenon, largely with 18-30 aged Millennials’, a self-professed “camera company”. The Company’s appeal lies in its quick and spunky, temporal multimedia messaging technology that appeals to heavily, more narcissistic Millennials.
However, Snap's appeal beyond this demographic seems to quickly fade as “adults” are still relatively new to Facebook and feel content with its expanded new features which also aim to cannibalize Snap's . and Its core messaging flagship product.
Briefly, Snap is a camera application that helps people to communicate through short videos and images known as a Snap. The Company offers three ways for people to make Snaps: the Snapchat application, Publishers Tools that help its partners to create Publisher Stories, and Spectacles, its sunglasses that make Snaps.
The Company’s core business opportunity is driving advertising products that include Snap Ads and Sponsored Creative Tools, such as Sponsored Lenses and Sponsored Geofilters. As of December 31, 2016, on an average, 158 million people used Snapchat every day to Snap with family, watch Stories from friends, see events from around the world, and explore curated content from publishers.
Our core fundamental thesis is Snap's phenomenal growth will radically slow as it reaches saturation levels in its key Millennial demographic, DAU (daily average users) year over year growth has decayed from 36% in q/1 to the 20’s%, which projects to a flattening to low growth rate within 2 years.
Furthermore, Facebook (FB), the ultimate knock-off artist will steal Snap's thunder in other demographic markets such as the “boomers”. Given its current lofty valuations, this will leave a steep plunge down to much lower and sustainable growth levels and subsequent valuations, we rate Snap a sell.
It is overvalued to its group valuation: on its Price/Sales ratio, (a key metric for non - positive eps reporting companies) trading at over 32x P/S vs 24x for the sector mean.
And based on next 12 months estimates. Snap trades at more than a 100% premium to its peers based on its EV/Sales ratio. At 9.69 vs. 4.62.
To recap our Sell Thesis:
- SNAP missed last quarter on key growth metrics
- ARPU (average revenue per user) -9% vs estimate in key North American market
- Low institutional demand due to control issues that limit important sources of new investment demand. Currently at 35% vs. 70% norm for similar social media high growth equities.
- Eps due 11/7, SNAP has missed estimates in its last 2 quarters and only quarters since going public.
- Stiff Facebook (FB) competition may significantly curtail long term growth potential.
- Our fundamental fair value for SNAP = $ 10 (150% premium based on EV/Sales to peers based on superior revenue growth rate for next 24 months).
12- 18 month target price: $10
Disclosure: I am/we are long FB.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
