Stocks rose for the first time in three days on Wednesday, while crude prices began to stabilized after a record plunge while better-than-expected earnings also lifted market sentiment in key sectors. The Dow Jones Industrial Average jumped 456.94 points, or nearly 2%, to 23,475.82, which the key market sectors surged late Wednesday. However, those stocks who are not among the “Mega-Caps” are still showing signs of strain and uncertainty.
While a large number of mid and large cap companies are continuing to struggle, some small cap companies are actually becoming more profitable and even beating their quarterly projections.
Today’s trading witnessed a small cap company posting it recent revenue figures, with a 121% increase in one of its subsidiaries, Surge Logics. Surge is a diversified holding company with multiple revenue streams. Since September, 2019, their revenues have increased from a reported $4.9 million for the 3rd Quarter, to a projected $18 million plus for the 1st Quarter 2020, with March revenues translating to over $84.3 million in annualized gross revenue.
Most notable has been the lack of market reaction to the strength of recent fundamentals. Our analysis suggest that Surge Holdings has hit an inflection point and is poised for continued growth over coming months as the Company continues to execute. Historically, Surge market capitalization has been 2.8x gross revenue. With an increase to $84.3M top line revenue, even a 2x valuation would indicate $1.63 per share.
- Surge Logic announced March Sales of $2.98 million, up 121% from February 2020 sales of $1.35 million and a 9 fold increase from March 2019 sales of $319, 042. https://finance.yahoo.com/news/surge-logics-reports-record-2-123010968.html
- Surge Completes Acquisition of ECS Network in 4th Quarter of 2019, adding $48.7 million in top line revenue and 9800 new retail locations bringing top line revenue to $68.3 million on an annualized basis.
- Analyst Report projects over 300% Increase in 2020 revenues to over $109M, increasing upside share price target to $3.45. https://www.goldmanresearch.com/Search.html?ordering=&searchphrase=all&searchword=surg
- Deloitte Technology Fast 500 recognized Surge as one of the fastest growing technology companies in North America.
- CEO announced all development work and product development completed in 2019. Surge is now ready for accelerated revenue growth in 2020. Revenues have grown over 400% since that announcement in September of 2019.
- CEO goal to build SurgePays™ Markeplace to over 100,000 retailers. With the ECS acquisition Surge has contractual relationships with 50,000 stores that they are in process of rolling out. C-stores and corner markets considered essential service businesses in all states.
On a technical stand-point, we are in Buy territory, as the company begins to recover from the global impact of the Coronavirus. Whats most significant is that the company actually grew during the Coronavirus, therefore signaling to investors that a major correction is in the near future.
Today, resistance point 1 was broken late into trading. This is significant because the volume pointed to a 75% increased buying vs selling during the trend break (last week). In short, this signifies that a market wide factor cause the drop (Coronavirus) in the trailing 2 weeks, with minimum Delta% returning to previous trading range at $0.35 to $0.46
It is rare that we find companies with a 400% increase in revenue and no corresponding increase in share price. For most of 2019 Surge historically traded in the $.50 per share range. With 103.3 million shares outstanding this indicates a $51.65 market capitalization. With reported top line revenues of approximately $18 million this is a 2.8x factor. With current revenue extrapolated at over $84.3 million at over $84.3 million, $48.7 million from the ECS acquistion and factoring the increase in Surge Logics to $2.98 ($36.0 million annualized) plus Surge Wireless and SurgePays™ Marketplace revenues; a 2x factor would indicate a current $168.6 million value in market capitalization or $1.63 share price today. This compounded with expected near term growth, recent positive news cycle and execution by management are the foundation indicators for what we see as the current value opportunity.
In short, SURG is a strong buy alert for us and a value long term growth play with improving fundamentals that have been underappreciated by the market given that recent past has been dominated by scaling infrastructure and intensive capital needs. The Company’s recent financial data suggests the company has entered a new growth cycle, and we are seeing the company transition into a new stage of cash-flow positive growth that should translate into a revaluation of its equity.
This is supported by a combination of strong current and coming performance of its Surge Logics segment, dramatic growth in its legacy Surge wireless business, and continued development of its next-generation SurgePays Network, which is the real disruptive story here.
What is the Surge Marketplace?
Surge is the developer of the SurgePays™ Marketplace Network for convenience stores, bodegas and community markets that provide products to the underbanked. Surge provides a distribution pipeline to these retail locations and then upsells and cross markets direct to consumer products targeting the 100 million prepaid wireless users and over 68 million unbanked and underbanked consumers in the U.S. These markets typically increase and perform better in difficult economic conditions.
Further, with traditional supply chains being disrupted Surge realizes an opportunity to increase their network of retailers seeking alternative supply sources. Since Surge is a technology solution they are more agile then traditional brick and mortar operations and have no risk associated with holding inventory. The SurgePays™ marketplace is a distribution pipeline that is completely product agnostic, where Surge can react to deliver new trending products rapidly, whether that’s the hottest new Keto nutraceutical, CBD energy mint, face masks or hand sanitizer.
Once a store is onboarded to the SurgePays™ Marketplace, a trusted profit partnership is established and Surge upsells other consumable goods by connecting manufacturers directly to these retail stores.
The SurgePays™ Marketplace provides manufacturers measurable cost savings and offers an efficient platform to access independent retailers to sell products nationwide with improved payment terms
The prepaid wireless and financial services are the profitable “door-opener” to build and add locations to the Surge Network and then Surge offers additional value add products through the SurgePay™ Marketplace to grow sales per store revenue. Where store owners can order a variety of products through Surge with Alibaba or Amazon simplicity and convenience. Bringing digital efficiency with fintech services to a distribution model that has not significantly changed in decades.
The CEO has published his vision in detail: “My strategy for business building over the last 18 years has been based on recurring revenue from providing life-enhancing technology products for the underbanked with a focus on “Relationships.” During this time period, the market has grown to over 100 million prepaid wireless users in the USA with approximately 35% of the country now falling into the underbanked category. This is the last digital frontier and Surge is positioned for the land grab.” Think 100 million prepaid wireless customers overlapping with 68 million in the US underbanked as a start of the addressable market
The CEO continues, “My personal goal is to have 100,000 convenience store locations in our SurgePays network with each store processing an average of $1,500 – $2,500 a month by 2021. We will also explore M&A strategies to own more brands we can input into our distribution channel.”
The Big Picture
The most important point to make for Surge right now is that the big picture model for the company is no longer abstract and theoretical. The strategy is in place and already starting to pay off. The fact that the market hasn’t noticed it yet should simply speak to the opportunity now present for new investment allocations to the company’s equity.
The most explosive factor in the SURG story is the imminent growth potential as the Company fully exploits its recent acquisition of the ECS Prepaid Network, adding over $48.7 million is sales across 9,800 retail locations with significant cross-sell opportunities for other Surge products and services as the prepaid mobile opportunity is graduated into the SurgePays™ Marketplace as a disruptive solution to outdated regional supply chain challenges.
The company built a broad infrastructure in 2019 to take advantage of this moment. And the network expansion provides a massive influx of market data: Surge sees all the data from other wireless providers with their network, currently over 600,000 transaction per month. Hence, the precise design of its new $30 wireless offering was likely a best-fit strategy culled from that data for establishing dominance in that market.
While there are plenty of questions still in place for both the market and Surge Holdings – we see Surge as a long term growth opportunity that the broad market is missing. We are very happy with the consistent increase in fundamental top line revenues within all divisions and some recent markers of strong execution, particularly in terms of an expanding the retail network footprint as well as recently accelerating topline performance. With shares trading below the levels established in September of 2019 and the dramatic increase in revenues it seems only a matter of time for the eventual move back to the 2019 highs and possible correct to a 2x top line revenue value. Again we believe the next financial filing will go a long way in narrowing this gap.