E EC USell: Renewed Growth Model Provides A Probable 100% Return Opportunity

Other catalysts are introductions of widely anticipated products like the next iPhone or Samsung Galaxy, investor conferences, more coverage (uSell is quite an unknown stock) and upbeat earnings calls (Q4 should be the first).

The upside

What's the stock worth? uSell is currently valued at $15 million. I conservatively project the annual revenue to grow in the 30% to 40% range. That makes an annual revenue of almost $10 million. The average price/sales multiple of such a high-growth stock should be at least 3, but let‘s apply the current running multiple of 2.3. That should catapult uSell's valuation to $23 million, equating to a 50% upside from current share price.

When using a blended approach of high growth and a higher multiple, the valuation could approach $30 million, equating to almost 100% upside. That‘s more than fair, Ebay‘s growth has stalled but it still sports a price/sales multiple of 4. I concur that the 50% discount in relative valuation to Ebay seems more or less justified. Ebay is a profitable company and has a far bigger moat. But uSell is in reality already making money on every transaction, is growing much faster and has a clean balance sheet, so I argue the discount should be far lower.

When uSell reports a net profit, a much higher multiple is even warranted. Since uSell is a software-based business, the company is capable of massive scaling, with minimal additional costs. Remember that the company operates in a growing multi-billion addressable market. As uSell grows, leverage amplifies what is applied to the bottom line. The NOL asset shields the company from future taxes. Durable quarter-to-quarter profitability could even lead to a >100% return.

Overall, I assess a 40% short-term surge to fair value as highly likely, a 100% return within 12 months as probable, and even higher returns as an interesting possibility.

Key risks

Although the upside is very alluring, there are risks to consider. Investors should bear in mind the next:

  • uSell is operating in quite a competitive environment. Margins could erode if competitors step up the plate.
  • This is an OTC stock. Beware of the risks associated with OTC stocks.
  • Limit your order, the bid-ask spread could be more than 3%.
  • If uSell won ‘t report profitability or even grow in 2015, shareholders could get burned.

Final risk vs. reward assessment

Normally I refrain from holding OTC stocks, but uSell is the little gem I’m willing to make an exception for. It sports all the features for a great risk vs. reward investment. Given the clean balance sheet, I hardly see any financial and/or dilution risk. The competition is fierce, but the addressable market is gigantic and still growing. With such a viable, renewed and scalable software-based platform, uSell should re-ignite its former rapid-growth state. I expect the share price to quickly readjust to its fair value in the $3.00 – $3.50 range. Eventually the growth adds up to the bottom line, and when that is bound to happen in 2015 the share price should surpass $5. An interesting kicker to the story is a downright take-over by a company like Ebay or Best Buy (BBY). Since the share price appears to have bottomed out on low volume, I think now is the time to initiate a long position.

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Disclosure: Long uSell. Please do your due diligence before investing.

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Comments

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George Lipton 5 years ago Member's comment

Hard to find current coverage on this stock. Have any updates on this or other stocks worth keeping an eye on?

Vintage Vixen 5 years ago Member's comment
Any updates on this report?
Kate Hayden 6 years ago Contributor's comment

Thank you for the extremely detailed report. I am certainly thinking about this much more than I would have otherwise.

Small Cap Gems 6 years ago Author's comment

Another insider buy two days ago: The CEO bought 3000 shares in the open market.

Kate Hayden 6 years ago Contributor's comment

It's also encouraging to see an author add insights to an article. I know this site is still small and new but I'm encouraged by the level of commentary.

Stock Sanity 6 years ago Member's comment

That's encouraging news!

Harry Sinclair 6 years ago Member's comment

I picked up some of this stock after reading John Ford's analysis and hint that it could be an acquisition target for ebay. The expected increase never materialized but I still have hopes for USEL. I agree that it is a gem and is under-priced.