We recently had the chance to talk with Jonathan Reich, COO of Zedge. Mr. Reich has spent the past 5 years with Zedge and the past 20 with IDT and various related companies and spinoffs. While we were, we admit, rather skeptical about Zedge going in, after speaking with Mr. Reich, we find it to be an intriguing opportunity if the valuation is right.
Unlike other phone customization providers who have profited largely through unexpected recurring billing and impossible cancelation, Zedge is entirely advertising supported. 94% of revenue comes from direct advertising in the company’s app with 6% coming from the company’s management of advertising for other apps. With almost no marketing spend, the company has accumulated over 190 million downloads and currently has 35 million monthly active users, 14 million of those in the United States.
For the year ending July 31, 2015, Zedge had $1.587 million in net income. For the subsequent six months, net income increased to $1.436 million. Assuming that run rate and given that the company anticipates between $750,000 and $900,000 in annual costs associated with being public, it seems reasonable to anticipate earnings over the next twelve months will be between $2 million and $2.5 million, assuming minimal growth. If the company can continue to improve its monetization of its large user base, we could easily be surprised with $3 million to $4 million. At the company’s when-issued price as of 10am on May 27 of $6.75, with 9.3 million shares outstanding, the company’s market capitalization is around $63 million, not terribly rich given the historic earnings growth.
When you look at it the way that Mr. Reich does, however, the valuation becomes cheap indeed. Mr. Reich points out that there are very few free apps with the installed base of Zedge, and that almost all of them are owned by a handful of companies- Alphabet(GOOG), Facebook(FB), Apple(AAPL). Those companies that are independent on the list have raised money at much higher valuations per active user. For example, Snapchat, with 100 million daily active users has raised money at an $18 billion valuation. Of course, Zedge’s users may be less valuable than Snapchat’s, but are they really 100 times less valuable?
Reich paints a compelling vision of new features for consumers and new advertising products that will drive future growth. It is also worth noting that Zedge’s user base is largely Android and that future iOS products could be a significant opportunity. Zedge’s audience is 64% male and 68% 18-40, making it an attractive platform for advertisers. Ultimately, the company’s value will be dependent on its ability to execute and monetize. Given what the company has been able to achieve thus far, it may be a bet worth taking.
Disclosure: The author owns when-issued shares of Zedge.
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