September 28, 2020 7:24 AM

Leaf Mobile: a growth stock in a falling market

The current selloff that’s hitting tech stocks especially hard is not an indication of market-wide panic taking hold. Rather, its devastation is concentrated on big name-brand stocks that have been luring in get-rich-quick retail investors over the last few months. This means that overlooked companies like Leaf Mobile will survive the carnage, delivering growth opportunities in a tumbling market.

/ Published 3 weeks ago

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If one thing boomed more than mobile gaming during COVID-19, it was retail investors splashing their cash on stocks. While mobile gaming studios like Leaf Mobile (TSX.V: LEAF) were enjoying a gentle bump in revenues, the stock market was being flooded.

Jacked up on stimulus checks and afforded the time to take the plunge, homebound hopefuls hopped into the markets. Online brokers saw massive client spikes, with Charles Schwab, TD Ameritrade, Etrade and Interactive Brokers all reporting huge increases in activity. The millennial favourite, Robinhood, saw a record 3 million new accounts opened within a 4-month window.

Concerns about this are now being raised. “Bond King,” DoubleLine Capital CEO Jeffrey Gundlach, is even going so far as to say that it’s “downright terrifying.”

Where’s all this market doom and gloom coming from?

This historic influx of retail money has caused huge distortion in the markets. As inexperienced investors started trying to grab a slice of the market-comeback pie, two types of trades have emerged as clear favourites: highly speculative day trades on the beaten-down penny stocks of worthless, near-bankrupt companies, and; frenzied buying into the shiniest of name-brand stocks.

While the first trend is concerning for the financial health of the individuals caught up in this style of glorified gambling, the second is perhaps more concerning for the overall market. The consequences of it are beginning to make themselves known, with massive selloffs in overhyped tech stocks taking place this month.

None have been more spectacular than Tesla’s sudden drop of around 35% in the space of a week, tumbling from a top of just over $500 a share last week down to $330 at the close of trading yesterday.

Why this is not bad news for companies like Leaf Mobile

While the selloff hasn’t been as significant everywhere, other shiny brand-name tech stocks are all seeing billions wiped off their market caps as frenzied investors attempt to atone for their sins and get out while they still can. But greatly inflated equity prices have been mostly confined to the glittery, attention-grabbing areas of the market. There are still plenty of stocks out there that didn’t get a free ride on the stimulus check wave, partly due to their invisibility on the radars of retail investors.

As an illustration of what hype can do: the massive online marketplace 58.com (NYSE: WUBA) probably doesn’t mean much to the average North American investor, even if it is a company pulling in US$15B in total revenue per year with a market cap of $8.38B. It’s delivering $2.03 EPS for a PE of 27.46. Since the outbreak of COVID-19, its stock price has corrected back to pre-COVID levels and stabilised there. It’s even showing immunity to the current selloff taking place.

Compare this with Tesla, which is only generating $25B in revenues. Its margins are tighter and its burdened with debt, blowing its PE ratio out to 855 as it still maintains a market cap of over $300B, even after the last week’s worth of selloffs! This is all down to the hype surrounding the brand and the celebrity power of Elon Musk. Yet hype and celebrity power do not lift the ceilings and competition capping its growth in the auto market. And its battery business is subject to even tighter margins.

So where are we going?

In a nutshell: if you’re aware of what’s driving the current doom and gloom in the markets, then you know how to avoid it. Essentially, even if they’re not necessarily smaller companies, the lesser-known ones like 58.com and Leaf Mobile are being spared from the current selloffs because they were overlooked to begin with.

Leaf Mobile is the perfect growth stock in this tumbling market

The lesson here is that any impending market crash is not going to be all-encompasing, taking out the whole market with it. It won’t even wipe-out the entire tech sector responsible for much of the overstretched pricing. This means that stocks like countercultural game creators, Leaf Mobile Inc, still offer growth opportunities which investors can buy into at a discount right now.

As a young company, Leaf’s financials might not appear convincing at first glance. With 1H earnings of a minuscule $100k vs a market cap of $54M, its equivalent PE ratio of 270 is still looking inflated. It’s nothing compared to Tesla’s, but still looking like a bit of a stretch.

But this ignores the fact that Leaf has incurred a lot of big, one-off expenses attributable to listing and acquisition costs, and game title launches. Behind this figure is a net Q2 cashflow from gaming operations of $2.2M which, assuming that cashflow and earnings do eventually converge, potentially drops PE ratio under 10 if they keep ancillary costs of doing business low. That presents a massive bargain opportunity for investors looking for growth stocks right now.

With growing revenues—$9.6M in Q2 2020, up 84% from $5.2M in Q1 2020—and even bigger releases in the works, the future is looking bright for these cannabis game kings. With their relative anonymity amongst retail investors leaving them mostly overlooked, Leaf Mobile will be a top pick for investors looking for growth stocks in this turbulent time.

(Featured image by Eddy Billard via Unsplash)

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