Surge Holdings: The Unknown Story Of High Potential Growth

But an MOU is not legally binding. 40,000 stores would be huge, but what if that plan falls through? MOU is like a letter of good intentions. Investors should watch for any potential announcement of a definitive signed agreement to replace the MOU. A binding contract would have infinitely more value than an MOU. And that agreement does not explicitly mean that those 40,000 stores are forced to place Surge products inside each location. It is my understanding that the buying group endorses and makes available through their own channel the Surge products and services. The next step is to see how many store owners order in Surge-branded and partner products.

Let’s assume that a definitive agreement gets signed and announced. Let’s further assume that 40,000 stores are rolled out in 2019. If the $1,500 in revenue per store is reached across 40,000 stores starting in 2020 – what sort of profit might this generate?

  • I will use a 2% gross profit margin
  • This will result in $14.4 million gross profit
  • The 9.55x multiplier results in a market cap of $137.5 million or 3.2x the current size

Again, keep a close eye for any potential announcement that the MOU has been replaced by a signed contract with the trade organization. Keep a close eye on how many stores sell Surge products. And finally, keep an eye on how the products and services are received.

Are They Able To Scale?

One issue that high-growth companies typically have is difficulty when trying to scale. The needed infrastructure to grow from $10 million in sales to $10 billion is massive. They suddenly need to increase the size of the manufacturing plants, train additional support staff and dozens of other things that will impede growth. Or you can try to cut corners and deliver a service that makes a poor first impression.

Is Surge Holdings set up to scale? Here are a few items to think about:

  • Brian Cox, Surge Holdings CEO, has already built (and in some cases sold) telecom businesses
  • Surge sells cellphones but they do not manufacture them
  • Surge provides a banking service without needing to be a bank
  • Manufacturers will advertise their own products which in turn promotes the SurgePays portal at no cost to Surge
  • Store owners are revenue-sharing partners that also promote Surge products and services at no additional cost to Surge
  • Cellphone users are delivered ads featuring new Surge products and services without a costly advertising budget

What about the on-boarding process for 40,000 stores? That is roughly 110 stores per day or over 3,000 per month. In an interview with MoneyTV, the CEO of Surge discusses how they have simplified the digital on-boarding process. The CEO indicates that they will on-board 3,000 stores a month. You might want to watch the 5-minute interview in its entirety.

What about the necessary support staff to promote and onboard?

Surge Holdings recently acquired a 40% stake in Centercom Global which provides the necessary human capital to scale. Centercom Global is a BPO, or Business Process Outsourcing, company. They have the following objectives to support rapid growth:

  • Assisting in on-boarding SurgePays Portal into over 40,000 retail locations (in 2019) and subsequent ongoing white glove support
  • Aggressively marketing new “Free Wireless Service” program to substantially grow customer base while beefing up customer service
  • Launch SurgePays Re-loadable Visa Card by the end of 1st quarter
  • Support IT infrastructure including database management
  • Up-sell related fin-tech products to the existing customer base to increase revenue

Estimating The Future Value Of The Company

The story always comes back to this – how high (or low) could the price go? With a speculative company such as Surge Holdings, and particularly since they are pivoting from their past businesses, it is very difficult to assess. The upside potential is very large. But the hard numbers have not come in yet, so I am just speculating.

On one hand, the risk with any venture can be a complete loss of all investment capital. There are various pieces to the puzzle and they all have to work in a coordinated fashion to make Surge Holdings a high-growth opportunity. Please do not ignore the risks involved with smaller firms who plan big.

On the other hand, big companies start out as small companies. Don’t discredit the small firm just because it is small. The upside potential is much greater for smaller companies with higher risk.

The following will try to estimate a value of the company assuming that the roll-out takes place on at least 40,000 stores and that the products and services gain some momentum. I will apply a 9.55x multiplier to my personal forecast of gross profit. This will give a market cap projection for each opportunity. My estimate is based on Surge rolling out and executing according to plan over the next 24 months:

  • 1 million subscribers of the basic free cell service plan = $42 million gross profit = $400 million market cap

This assumes $10 in revenue from ads per user per month. Assume 35% gross margin for $3.5 million per month in gross profit or $42 million per year. Apply a 9.55x multiplier for $400 million market cap.

  • 200,000 working people using SurgePays Visa as an alternative bank account = $48 million gross profit = $458 million market cap

This assumes 200,000 people who earn $2,000 per month using the card as their bank account. $400 million of cash throughput per month works out to $4.8 billion per year. Assume 1% gross margin for a gross profit of $48 million annually. Apply the 9.55x multiplier for a value of $458 million in market cap.

  • SurgePays Portal profit on 3rd party products across 40,000 stores = $14.4 million gross profit = $137 million market cap

This assumes 40,000 stores (by 2020) each doing $1,500 worth of sales per month through the portal. This equates to $720 million per year by the end of 2020. If 2% of that is captured as gross profit, we have $14.4 million annually. Apply a 9.55x multiplier for a market cap of $137 million.

Assuming no dilution, this $45 million market cap company has the potential to trade around $1 billion. That is 22.2x higher than the current priceThis provides a share price target of around $11 assuming no dilution.

This is what I am not including in that projection:

  • Current revenues which will likely be around $15-$17 million for 2018
  • Profit from selling physical cellphones
  • The paid cellphone plans
  • The IP value of the block-chain powered nationwide portal

There are more opportunities that are open to the company such as the following:

  • Buying out Mulaah to keep more of the revenue in Surge
  • Integrating their own cryptocurrency (they already have one)
  • Integrating many other products and services

Is this valuation out to lunch? One point to consider is how the other ‘not-so-free' telecom company had a valuation that was likely close to $1 billion as of 3 years ago. It is hard to get solid numbers but it seems that they have 2 million subscribers. If Surge can execute on their plan, $1 billion market cap is not unrealistic.

What Do The Financials Tell (Or Not Tell) Us?

Can’t we just analyze past financials and quickly come up with what this stock is worth today? You might think that you can just use a price-to-earnings ratio or a price-to-sales ratio to discover what fair valuation is. But you do not typically use trailing P/E or P/S ratios with speculation stocks. The very nature of a speculation stock is that you are betting (or speculating) on futureprospects. Revenues are typically small compared to the future forecast. Should you just wait it out for a couple of years until they have high trailing growth under their belt? That would be the lower risk and lower potential return option… but consider an alternative way:

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Disclosure:

I/we have no positions in any stocks mentioned, but may initiate a long position in SURG over the next 72 hours.

I wrote this article myself, ...

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Barry Hochhauser 4 months ago Member's comment

Enjoyed this article, thanks.

Bill Johnson 4 months ago Member's comment

Good find!