Reminiscences of a Stockblogger

Research: Eastside Distilling

I think* that the market might be missing something here. It looks to me like the sale of Redneck Riviera (RR) yesterday should be a bigger deal than the stock price is suggesting today.

I looked at the stock a few months ago. I wasn’t totally convinced about the cash position and losses. They were turning things around but still losing money. But this sales changes that picture quite a bit I think. They are selling a money-losing, albeit new and growing (pre-pandemic) brand for, from what I can tell, around 3x revenue.

On their Q2 call they talked about their canning business (called Craft Canning, canning 3rd party bottling, canning, and packaging services for existing and emerging beer, wine and spirits producers). They said “A company of this nature typically is valued at 1.5x sales or 6x EBITDA.”. In the Q&A they qualified that as a valuation for a PE investor interested in this type of business.

I do the math on this and Craft Canning is probably worth $15mm to $18mm itself (Canning and Bottling was $2.56mm in Q220 at 30% EBITDA margins). Unless I’m missing something, that is more than the company is worth right now after they get the $8mm from RR.

I might be missing a piece, still digging (need to look at the share comp for Azunia still), but based on what I see so far, I think this stock should be higher.

Notes from last Q2 and from RR sale.

• $1.9mm of cash
• $5.7mm of debt
• another $15mm of deferred consideration for Azunia which is just shares I think
• 10mm shares outstanding at $1.40 is $14mm
• so its an EV of $20mm roughly and that is before $8mm from RR sale – so $12mm now versus CC which is probably worth $18mm

Q220 results

• cash burn cut in half from Q120
• Craft Canning has dominant position in Pacific NW
• CC revenue up 20% yoy in Q220
• CC “doubled from first quarter to second quarter”
• customer list for CC was up 30% since March
• expect CC to have 35% EBITDA margins in Q320:

The current EBITDA margin from this business unit is well over 30% in 2020. We estimate the division can possibly reach $10 million in sales.

• CC benefiting from pandemic:

“before the pandemic, 50% of beer was being put in kegs, and then it wasn’t. I would suggest this change has legs.”

• they peg canning operation at 1.5x revenue, 6x EBITDA
• CC was $2.56mm of revenue in Q220 – so even ignoring growth – is probably worth $15mm-$18mm+ on its own
• are in process of downsizing overhead, made expense cuts of $2mm (annually?)
• they do mention potential for outsourcing
• Redneck Rivera revenue was down 30% yoy – from 10Q this was $0.2mm – suggests RR sales were about $670k pre-pandemic
• Azunia revenue down 38% yoy because it depends on on-premise business and that was shut down
• Azunia is relatively new brand – they acquired Azunia Tequila in Sept 2019
  • at the time had TTM sales of $3.5mm on 13,000 cases sold
  • sold into on-prem location in West and SE US
  • they said expect a positive EBITDA impact from Azunia in 2020
  • acquired as all-stock transaction
  • it looks like 850k shares up front, 350k shares after 18 months
  • another 1.5mm shares if Azunia ups revenue to $9.45mm in Y2
• Portland Potato Vodka revenue was up 18% yoy
• Burnside revenue up 4% yoy
• Pacific NW beer + wine market is around $100mm, they have about 10% of it
• on craft side they are only in Oregon, Wash, Colorado right now
• had 11 delivery trucks heading into quarter, brought new one on in Q2, have another 2 on order

Sale of RR and Q3 Update

• announced Q320 revenue of $4.5mm to $5mm – this would be up from $4mm in Q220
• also further EBITDA improvement
• selling RR for $8mm
• so that alone is very good
• RR was clearly a money loser, not sure how much
• I think RR revenue was about $2.7mm or so pre-pandemic so they are selling it at almost 3x revenue

More on Fastly and Limelight

This whole Fastly situation is so interesting. I just don’t see what the market sees in this company (other than growth of course).

Last night Fastly reported earnings and they weren’t all that great from what I can see. Lots of interesting tidbits but the first is on Tiktok.

So they lost most of the Tiktok business in Q3 and it continues to leak in Q4. They aren’t even guiding for any Tiktok revenue in December.

If you remember, the basic question that started me down this whole wormhole was – if Fastly is so great and Limelight Networks so shitty, then why is Tiktok leaving Fastly and looking at signing a deal with Limelight?

Well Fastly blames the Tiktok loss on regulations (ie Trump), which kinda makes sense. But I don’t quite get why Tiktok would be ramping down Fastly when the US ban is on hold and we don’t even know if it will happen at all?

I thought this was an interesting exchange from the call. Fastly was asked a very simple question: Is Tiktok moving traffic as a temporary measure?

The right and easy answer to this question is something like: Yeah we hope so but we will have to see how the regulatory side plays out.

Instead, this was Fastly’s answer:

Yes, Robert, thank you for the question. I think this is a very dynamic situation. I come back to that. I think if you think about the time line over the last few months since we last spoke, a lot has changed. A lot that we thought was going to happen may not happen. So I think — I’m not sure we are in certainly no position to have any proprietary insight into any of this situation. I think what we would say, in general, is it’s very dynamic. We don’t have clarity on the process, and we expect the situation to remain unresolved for a period of time. And so I don’t have any more insight in terms of what that looks like.

 I think from the publicly available information that we see, it is very clear that it is important for any customer in this position to be able to continue to serve their customers if and when certain vendors are prohibited.

I think its a legitimate question to ask why Fastly didn’t just say we hope so and instead answered with the above gobbledygook.

Second point. Fastly made a fairly big acquisition in the quarter with Signal Science. It was like $775mm, so not inconsequential. SS is going to add $8mm of revenue this quarter. That is actually a sizable chunk of Fastly’s yoy growth in the quarter. It means without the acquisition they’d only be growing 25% yoy.

Did you know that Fastly only has 40 US patents (they do have another 47 pending)? About the same as Limelight.

I’m thinking more and more that the differences between the Limelight business and the Fastly business has a lot of smoke and mirrors to it (as well as some legitimate substance). Yes, Fastly is developer focused (as they tell us ad nauseam in their 10-K which btw reads like a marketing letter) and yes they have better technology and yes because of that they can charge higher margins (which are charged to mostly smaller players btw). But for the big traffic players (like Amazon, which is Limelight’s biggest customer by far, and Netflix, which Limelight lost the business of a while ago when they started their own CDN) what matters is price because at the end of the day these guys are just pipelines for data.

Meanwhile Limelight is getting into the edge computing side that Fastly excels at and is growing that business so it will be interesting to see how that piece plays out.

So no, Limelight is not worth a huge sales multiple and right now it doesn’t have that. I just think its fallen too far.

Fastly, on the other hand, does not seem to be worth 25x sales. Take a look at the chart. This was a $20 stock in 2019 and for the first few months of 2020. It didn’t do much of anything.

You have to think that this year, with everyone online, their pricing model (which is volume based) should be booming, yet their growth is kinda meh and the stock price, even after this collapse, has still tripled.

This isn’t a Limelight is better than Fastly argument. It is more a compare these two companies, which have similarities and differences, and ask if one deserves to be worth 12x more than the other?

I just don’t see it.

Why is Fastly worth 10x what Limelight is?

I have a pretty straightforward question I am trying to answer.

I was listening today to this podcast interview with Fastly CTO Tyler McMullen when it occurred to me – why is Fastly worth 20x sales when Limelight is only worth 2x sales?

Actually more. Fastly trades at 26x sales. Limelight trades at 1.9x sales.

I do understand that Fastly is a better company. They are clearly growing much faster. They have far higher gross margins. They have a developer oriented product that is geared toward edge deployment of apps, whereas Limelight seems like more of a plain vanilla content delivery network.

But here is the thing that has me thinking. On their Q3 call Limelight said they weren’t able to close on one of the big deals that they had anticipated because of geopolitics:

 In the July call, the customer that we were hopeful that we were on the 1-yard line of closing it, actually hasn’t closed and may not close until middle of next year due to some geopolitical things that have gone on with this company. So that’s the bad news.

So… that customer is likely TikTok. And it is too bad they didn’t close, it would be a big win for LLNW. Hopefully it still happens once the dust settles.

But the bigger point for me is this – we already know that Fastly had a Q3 miss because they lost the TikTok business. TikTok is like their biggest customer – something like 13% of revenue.

So how does LLNW steal away TikTok if Fastly is so much better than them?

Look, I’m sure Fastly has a better product than Limelight. I’m going to dig into this in the next few days and figure out just how much better. But I’m a little skeptical its more than 10x better.

Limelight is down a pretty ridiculous amount in the last two days because their last quarter was – meh. And actually, it was better than meh, but they had bad gross margins which analysts have focused on and that seems to have led to everyone to sell the stock like this is an oil company.

Limelight has subsequently said that the margin miss was in large part due to one customer that didn’t deploy as much as fast as they had expected. What I heard on the call is that this will right itself and that the business is sound.

I realize the Limelight business is not perfect. They have competition. They have margin pressure.

But the stock is down to the level of the COVID bottom. This for a business that delivers video content – I mean does that not have to be one of the few legit areas of growth?

Something seems mis-priced here to me.

Research: Silvergate Capital

I am so annoyed with myself for not buying into this one sooner. It has been on my radar since July and for some reason I kept putting off looking at it in detail until they released earnings today. Their Silvergate Exchange Network (for digital currency clients) is acquiring customers at a faster rate, the resulting growth in NII is great and while its not the cheapest bank in the world at ~1.5x book after today’s pop, it is not ridiculous given how they have positioned themselves. Oh well, better late than never – argh.

• market cap of $386mm (Friday close)
• book value of $277mm – trades at 1.4x book
• Operate Silvergate Exchange Network
• proprietary, virtually instantaneous payment network for participants in the digital currency industry
• saw 68,361 transactions, volume of $36.7b – this is up 70% and 65% over Q220
• Digital currency fee income of $3.3mm – up 36% compared to Q220

• say they have over 200 prospective digital currency customers
• Digital currency deposits grew by $586mm to $2.1b in quarter – most of their deposits are digital curency, about 90%
• overall NII was down but that was because of no GOS:

• their fee income is exploding
• consider that net income for the quarter was $7mm and they had fee income from digital currencies of $3.2mm and that is increasing at $1mm per quarter right now
• meanwhile their non-interest expense barely moved, up about $150k qoq
• ROA was 1.13% in the quarter, ROE was 10.14% – these seem like decent numbers even if you are buying it at 1.5x book