MarketWise (NASDAQ:MKTW) is a financial content and analytics company that provides research and information to self-directed retail investors. The company operates multiple well-known platforms, most notably InvestorPlace and Stansberry Research.
After dropping more than 45% YTD, MarketWise looks like a stock that could make a comeback. Will MKTW become a multi-bagger stock and 3X over the coming year, or will shares in the company continue to slide?
Recent Profitability Bodes Well
Perhaps the most positive aspect of a MarketWise investment opportunity is the fact that the company is profitable, even if only to a very modest degree.
In Q1, the company reported GAAP earnings of $0.04 per share as it followed through on plans to re-ignite high quality growth.
These initiatives focus on retaining committed investors as subscribers, and potentially generating a lifetime worth of revenues from each user.
As noted in the company’s Q1 letter, the effect of enthusiastic retail investors who subscribed during the 2020-21 era slowly leaving has been a headwind for the business.
Though significant, it’s worth noting that MarketWise’s net income is still small relative to its revenues. In the trailing 12-month period, the company generated a total GAAP net income of $1.8 million on revenues of $448.2 million. As such, any future rise in share prices will likely require substantial improvements to net margins.
The upside, though, is that MarketWise isn’t in a bad position financially. With only about $1 million in long-term debt, the company is well-insulated from the adverse effects of rising interest rates on corporate borrowing.
MarketWise also maintains a cash reserve of about $131 million. Though this liquidity has declined by about 18.6% over the past year, this is still more than enough to sustainably fund the company’s operations.
Declining Revenues Pose Concerns
Arguably the biggest obstacle for MarketWise is its falling revenue. The company’s revenues peaked in 2021 as retail investors poured into the stock market.
In each of the last eight quarters, MarketWise has seen its revenues fall on a year-over-year basis. The cumulative effect of these declines has been substantial. At its best, MarketWise brought in $147 million in Q4 of 2021. By Q1 of this year, that number had fallen to $109 million.
Another issue for MarketWise is the fact that the company’s moat isn’t particularly strong. Though MarketWise owns several well-recognized subsidiaries, the ecosystem of businesses providing investment information online is quite large.
With content ever more commoditized, MarketWise is dependent on sharp copywriters and imaginative marketing campaigns to beat the competition. Those assets can quickly become liabilities with changing times.
Another hurdle that MarketWise will need to overcome is its declining subscriber count. Across its platforms, the company had about 683,000 paid subscribers as of the end of Q1. This was down from 777,000 in the year-ago period.
Such a rapid attrition rate could prove to be very problematic for MarketWise, though the company is working to turn it around by relaunching its Brownstone Research brand to draw in new subscribers.
The Ugly Side of The Business
In addition to more normal business problems, MarketWise is still attempting to shake off the effects of a scandal at Legacy Research, one of its subsidiaries.
Earlier this year, the company revealed ethical breaches at this subsidiary, including at least one instance of a manager receiving undisclosed compensation for recommending poor stocks in order to bolster share prices.
MarketWise promptly unwound the business and reassigned or terminated the 104 employees working there. Though the worst effects of this reorganization are mostly behind MarketWise, it may take the company time to re-establish trust with subscribers and replace the revenues Legacy Research contributed.
Where Do Analysts See MarketWise Going?
Though analysts basically agree that MarketWise share price is likely to go up from these depths, a great deal of disparity exists among forecasts.
The low 12-month forecast for MKTW stock is $2.00 per share, while the highest is $5.50 per share. Considering the current price of $1.55, this implies gains of anywhere from 29% to 354%.
It’s probably best to take these projections with a grain of salt. With only three analysts offering price targets on the stock, more bearish views may not be fully reflected in current ratings.
Furthermore, only one of the three forecasts has been updated in the last six months. That forecast was the lowest one of $2 and was lowered from a previous projection of $3.50.
Is MarketWise a Value Trap?
Considering the company’s declining revenues and very thin profitability, it’s at least worth exploring the possibility that MarketWise is a value trap.
At 1.2x sales, the stock is priced at a modest multiple to its revenue. The price-to-cash-flow ratio, however, is still fairly elevated at 61.4x, which presents an interesting mix of high and low value multiples.
The value trap case, though, doesn’t hold up when we take a closer look at the company. To begin with, the lack of debt protects MarketWise from any serious threats to its ability to do business.
Peter Lynch once quipped that it’s very difficult for a business without debt to go bankrupt, and MarketWise seems to be a good example of this rule.
Seeing as the company hasn’t posted a significant loss since Q3 of 2022, there is not much reason to think that it will run through its cash reserves or struggle to remain operational.
So, Could MarketWise 3X?
Although the value trap argument doesn’t hold much weight in MarketWise’s case, it still appears unlikely that the stock will triple anytime in the near future.
It seems more likely that MarketWise could rebound toward the $2 mark, especially if it can generate another quarter of respectable earnings. Anything much above that, though, appears to be a stretch based on the company’s current performance and headwinds.
Given the stock’s recent volatility, investors may want to wait for signs of improvement before looking seriously at buying MarketWise.
If the financial publishing firm can begin growing revenues again and gradually increase its margins, there could be a lot to like about this stock. At the moment, though, too many uncertainties about the company’s future exist to make it appealing enough to be a strong buy.
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