Zedge Drops Late On First Day Of Trading After Spinoff Completion Creating Attractive Opportunity

Yesterday, Zedge(ZDGE) completed its spinoff from IDT(IDT). The press release is short on details, focusing on the usual boundless optimism associated with a new spinoff.

Tom Arnoy, co-founder and CEO of Zedge, said, “Since our inception, we have been focused on developing an exceptional service that enables Zedgers to express their identity, feelings, tastes and interests on their mobile phones with outstanding personalization content including wallpapers, ringtones, app icons and notification sounds. As a result of this focus, we have developed a huge following. We have tremendous opportunities for continued growth before us, and we will continue to execute on our growth strategy delighting customers and attracting new users.”

Jonathan Reich, CFO and COO of Zedge, said “We are grateful to IDT for its support during the past years enabling us to get to this point, and are excited by the prospect of continuing to grow as an independent company in order to unlock value for our shareholders.”

Zedge stock, which had performed well in when issued trading, held up for much of the day, but between 3:33PM and the close, fell from $6.40 to $4.70. Much of the stock’s trading volume came during this time period and just before it, including some larger blocks. It may well be that a large holder of IDT wanted out of a stock that did not meet his objectives. Of course it may be related to company performance as well.

It just so happens that after the bell yesterday, IDT reported earnings for the quarter ending April 30.  Included in that release were Zedge’s numbers for the quarter.

Zedge’s revenue in 3Q16 was $2.6 million, an increase from $2.2 million (+17.0%) in 3Q15 and a decrease from $3.5 million (-27.1%) in 2Q16. The year over year increase was driven by continued user growth and increased customer engagement. The sequential decrease conformed to expectation and reflected seasonal factors that increased revenue in the second quarter. Zedge generated income from operations of $239 thousand in 3Q16 compared $123 thousand in the year ago quarter, and $1.7 million in 2Q16.

The sequential decrease may have “conformed to expectation”, but I don’t think most investors understood or expected the extreme seasonality of the business. Factoring in the costs of being public, Zedge would have lost money in this quarter. These numbers came out after the bell and could not have been the direct cause of the drop, but, we guess the market is efficient. Or, it may just be a coincidence. Spinoffs often experience first day drops as holders shed the new company and this may be nothing more than that.

In any case, at yesterday’s close of $4.70, the market cap is under $44 million, which, even factoring in the reported quarter, seems to us to be an attractive valuation for a unique asset. The valuation may, indeed, get even better this morning as investors absorb the report and make their own decision.  In many ways, this reminds us of Nuvectra(NVTR), which recently plunged after its spinoff to below its cash position, only to quickly rebound.

Disclosure: The author owns shares of Zedge

15 thoughts on “Zedge Drops Late On First Day Of Trading After Spinoff Completion Creating Attractive Opportunity

  1. Darin

    Honestly, it will drop some more. Probably another 40-50%. The reason being, the stock has market cap of less than 100 million. So expect some funds to sell it between 3:30-4:00 pm. It is a pattern I have noticed in the past. I will give you an example, Horizon global. The first few weeks of its spin off, the stock sold off, and it was at the end of the day.


    I’ve taken a look at the Form 10, the directors compensation looks like it should be inline with investors, their incentive package looks similar to QHC, a recent small cap spin off that tanked early then made a sizable reversal, although still well of their opening price.

    Any idea what the thinking is behind the initial establishment of price? For instance when a company spins off a subsidiary and assigns say a 6:1 ratio, how are they arriving at that valuation and what parties is that initial valuation set to benefit the most? The parent, the spin off or should it reflect a generally established valuation based on industry or some other comparison?

  3. Barry Brewer

    It appears that the current P/E is somewhere in the 44+ range, so it seems as though this is a pretty expensive stock.

  4. Barry Brewer

    Hi Inelegant Investor,
    Thanks for the response, I appreciate your site, and thanks for asking, I had to reassess my figures.
    After review it looks lower, but still not exactly cheap. Options House listed it at 44, which sounded close when just went through it in my head, but…

    FORM 10 Net Earnings 2015 approx 1.6 million
    Shares outstanding approx 9.6 million
    EPS approx 1.6/9.6= .17
    P/E Today’s price $4.00/.17=24

    Yahoo has P/E at .25

    Thoughts? Discrepancies?

  5. Darin

    Zedge decided to do an earnings conference tomorrow. How the stock has acted probably has something to do with it. It is a good time to buy.

  6. Shean

    Well, it was definitely a good purchase!

  7. Michael

    guys this is literally just an app that let you switch background and ring tones. No barrier to entry whatsoever, a couple college dropouts can easily slap it together. It doesnt even have high ratings on iphone.

    you would pay 30mm + for this??

  8. Barry

    So the P/E is actually much higher than my estimate. Based on the company’s release EPS of $0.04, in relation to today’s price ZDGE is trading at at nosebleed multiple of 107.

    As much as I missed the blistering run up last week, this looks like a pass for me.
    Good luck to those who own.

  9. sean

    Hi Barry,

    Can you send the Form 10’s link for management compensation ? I couldn’t find any info on that. Their incentive package looks good? Thanks in advance


  10. Barry

    Hi Sean,

    I don’t know how I would post a link to that section of the form 10, but the incentive plan is listed under the Executive Compensation section (which is a link in the Form 10). It is page 46. The section is titled
    Company Long-Term Incentive Plan

    It seems like the incentive plan lines up with shareholder interests.
    Are you on Twitter? I’m at @Barry_Brewer

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