Last week CPNE made another multi month low on an intraday basis, and the stock turned right around and moved up.
I believe the $1.04 print on July 18th might have been the capitulation blow off for the summer season, and now it is probably time to get healthy. You see this time and time again. The market makers drop these stocks to multi month lows, blow out all the weak hands, and the stock turns around almost immediately.
If you’re wondering about my views on Q2 numbers, that’s the $64 million question. They are going to be worse than Q1, but far better than Q2 of ’06.
Here’s a quote from the CEO that I dug out of a rather obscure section in the SEC filings:
“Our membership revenues are generated by charging our members a monthly fee for the tools and services needed to create and run a successful Internet auction business. Members sign-up for our services at our website after having been directed to our website by internet advertising campaigns for which we pay a fee for each sign-up. As we closed the year in 2006 and began 2007 we generated record volumes of sign-ups from orders generated through our affiliate networks which partially contributed to membership revenues during the three months ended March 31, 2007. We also experienced a large amount of poor quality sign-ups and a higher than normal level of potential online fraud in conjunction with the record sign-ups resulting in increases in both our return rate and our chargeback rate.
In response, we have reduced our advertising related to these programs as we implement preventative measures and analyze the results of these measures. We expect that our gross transactions will decline but that our return rates and chargeback percentages will return to normal levels, and that the conversion rate from sign-up to billable membership will improve as a result of our actions. It is not clear how much the second quarter’s performance will be impacted by these changes, but revenues generated from this source will likely be reduced at least temporarily.
The higher chargeback volume as a percentage of gross transaction volume is viewed as a potential credit risk by our merchant processing banks. An unfavorable credit risk assessment may result in increased transactional fees and penalties, and higher reserve requirements. We depend on our banking relationships to provide payment processing to all our customers. If chargeback volumes continue at a high rate as compared to gross transaction volume, our merchant processing banks may determine that we are too high a credit risk and decline to continue to provide payment processing services which would impact our ability to bill and collect payment from our membership customers. In addition, processing rates may increase in relation to the increased risk assessed by our processing banks.
We are aggressively pursuing opportunities to increase traffic at our websites and partner websites to offset these risks and grow long term revenues from memberships as well as, upsell, and lead generation revenues. We expect that increasing our website traffic from sources other than our current affiliate network will improve the volume and quality of sign-ups, and reduce both our return rate and chargeback rate.”
So, as you can see, the company definitely had a hiccup in Q2- Since they have decided to totally abandon the practice of informing the public markets about their financial health, the market, typically irrational in the short term, has sold the stock off to an absurdly low level in my view.
In Q1 the company delivered $13 million in revs and $3.7 million in after tax profits. How about Q2? I have no way of quantifying the hiccup, but I would guess revs will come in between $7 and $10 million, and they will still make a profit. That is purely guess work.
The ’06 Q2 numbers were $7 million in revs and $1.4 million in profits. Do I believe they will beat that- yes.
So- here’s the real problem with CPNE, and it’s a buzz word you hear often in stock market circles: EARNINGS VISIBILITY. There is no earnings visibility, and there are many investors who believe their business model lacks value for the consumer. Hence, you have a stock that is trading very poorly after one fantastic year.
So, is the party over? Not likely. It’s worth noting that exactly one year ago today, CPNE was trading at $.50 per share. ’07 high you ask? $3.40.
Here’s the chart, and here’s what I find interesting. The faint blue line you see (I’ll make it easier to see in the future) is the downtrend line. If you have read my past BLOGS, you know when we fell below the $1.47 level, I stated the bottom was impossible to forecast.
Now, I believe we have hit bottom. Why- look at last week’s capitulation- it butts up right against the downtrend line. This stock is now highly likely to be in a uptrend, albeit a slow one for the time being.
In short, I believe the stock is a stong buy right now, with an SSL wherever the downtrend line happens to be. As long as we are above the line, we should be fine. Today, the line would be at about $1.
Here’s what I believe will happen. The company will report “less than robust” numbers for Q2, and the stock will go up. Why? Because the market has already priced in a worst case scenario.
Thinking much longer term however- this company will never get the kind of multiple the numbers would suggest unless management is willing to be more transparent. Head in the sand equals stock in the toilet.
Comments and questions are welcome.