TPS Trade Alert – October 20, 2015
Recommendation:
Buy iPass Inc. (NASD: $IPAS) up to $1.05 per share.
Profile:
iPass is in the Wi-Fi business. It provides connectivity as a hosted cloud service with 20 million hotspots in airports, hotels, airplanes, and public areas in 120+ countries.
The firm was founded in 1996. It started off providing internet dial-up service, evolved into broadband, and is now focused on Wi-Fi.
iPass is a company with an unattractive history. It’s never been able to put all the pieces together. Most notably, it has never recovered from its inability to transition from dial-up to broadband and wireless.
But over the past few months, iPass has taken significant steps not only to reinvent itself, but to stake a major claim in the global Wi-Fi business… specifically the segment of the business that caters to travelers.
Trade Rationale:
Today, the firm remains troubled. Tomorrow, iPass can benefit enormously from even a modest rebound in revenue.
Over the past three years, annual revenue has slid from $92.5 million to $69.8 million. Expenses have not been reduced proportionately. The value of the firm’s assets has also eroded over the past three years.
Knowing this, and going in eyes wide open, we see encouraging signs.
We like the work we’ve seen so far from the company’s new management team. It has put a renewed focus on marketing, expanding the hotspot footprint, and cutting expenses.
The firm has negotiated agreements that will more than double the size of the iPass Wi-Fi footprint to 50 million global hotspots.
Revenue that is both booked and deferred is showing signs of growth.
But here’s where things get interesting.
There is a potential breakthrough strategic partnership with Microsoft. iPass is Microsoft’s Wi-Fi service partner for Windows 10.
The precise financial impact of this arrangement, first unveiled earlier this year, is difficult to project because the firm has released few details.
But here’s what we do know.
The benefit iPass brings to the table is convenience for travelers who run Microsoft’s Windows 10 on their devices. There’s no need for them to change logins and Wi-Fi networks when they move from town to town.
To create more new customers and soften the expensive sting of churn, which takes place when existing customers leave, the company has launched a new plan it calls UNLIMITED.
In European markets, major carriers such as Deutsche Telekom and Orange Business Services have agreed to sell iPass UNLIMITED.
The company claims that early sales are positive.
Another new initiative designed to get more users connected to more Wi-Fi hotspots is dubbed INVISIBLE.
The new INVISIBLE technology lets iPass users discover and evaluate new hotspots, and if they meet technical requirements, add them to the network.
Investment Risks:
The key concern is revenue, attracting customers and keeping them.
Companies trapped in a commodity business rarely turn out to be highly profitable. Is Wi-Fi a commodity? If so, and consumers make decisions solely on price, and iPass can’t differentiate its product, a grim future lies ahead.
But we see a thoughtful attempt to mitigate this risk by creating offer-driven marketing such as UNLIMITED.
Another concern is the balance sheet. The financials are not pretty. Revenue growth is double digit negative. On the bright side, operating expenses are trending down.
Make no mistake. This is a turnaround.
Potential Return:
The stock is down 40% over the past year. Since February, it has typically been trading in a narrow channel.
Short-term, a favorable earnings report or two could easily send the stock back up to where it was trading this time last year, between $1.60 and $1.70.
Longer term, within the next 18 months, we see the potential for iPass to be trading in the $3-4 range.
Key Facts:
Company: iPass Inc.
Ticker: IPAS
Recent Price: $.90
Buy up to Price: $1.05
Market Cap: $62.5 million
Avg. Daily Volume (3 month): 94,229 shares
Chart:
Category: TPS Trade Alert
