Spark Networks (LOV): An Overlooked Investment with Asymmetric Expected Outsize Gains

Spark Networks (LOV) is a mean reversion candidate, potential enhanced gains from a full turnaround.The risk reward probabilities look favorable at current price of $1.58 per share.  

Spark Networks is an online dating company with two core properties, JDate.com and ChristianMingle.com. JSwipe acquired  for 7M at end of 2015 to reach a younger mobile friendly demographic in its Jewish network. JSwipe with 500,000 users offers profitable growth opportunities. 

The below graphic of Spark's properties taken from the May 1st investor presentation 

Summarized rationale to support the current market's discount thesis.

Historical valuations are at 10 year lows for EV/Revenue, EV/GP, P/B and enterprise value. 

The 52 week stock return is a negative -52%, enterprise value down -125% from 2012, -74% from 2013.

Spark (LOV) trades at a deep valuation discount to prior online dating acquisitions.Plenty of Fish with 75 employees acquired for 575M by Match.COM during July 2105. The valuation was 5.75 times revenue. LOV trades at less than 2 times gross profit or .9 EV to sales. 

Large expanding 2.40 billion USA online dating market. Spark is a top 5 participant. 

Osmium (value investment firm)initiated a proxy fight at the end 2014 to remove management. New CEO Michael Egan started during 2015 along with other technology competent managers. CEO Michael Egan spent the past dozen years as a senior executive at Internet Brands and Yahoo.

An aggressive new strategic focus implemented this quarter; costs reductions to improve contribution margins and free cash flow. Operational cost savings of 4.50M annually coupled with reduction of direct marketing expense. Technology improvements supporting a lower touch have enabled Spark to lower headcount by close to 40%. “ChristianMingle direct marketing investment will be around $1 million to $1.5 million per quarter moving forward, this equates to a $3 million to $3.5 million savings per quarter compared to their Q1 Christian Network's direct marketing investment.” The low spending is likely to translate into meaningful profits. 

Largest shareholder Osmium Partners has a board seat. Aggressive recent insider buying at higher prices by concentrated micro cap value investor Miller Lloyd.

Last week Miller Lloyd purchased 20,303 shares at $2.20 adding to his existing 787,542 shares held. Other value investors holding shares, Robotti Robert, Royce , Whitney Tilson and Potomac Capital

The  legacy technology stack is outmoded.Hence the prior 12 month technology investment focused on expanding their freemium lightweight mobile applications. The recent JSwipe acquisition offers a great opportunity to create additional improved mobile applications to up sell customers. 
During the recent earnings call CEO Eagan responded to a question on strategic alternatives. We have retained a financial advisor and we're still speaking with them about alternatives, but at this time we're not really in a place to state anything explicitly”.

Price = 1.58 
Market Cap: 40.90M,  Enterprise Value:36.82M
Price/Book (mrq): 2.74 , Enterprise Value/Revenue (ttm): .83
Revenue (ttm):44.51M , Revenue Per Share (ttm):1.75
Qtrly Revenue Growth (yoy): -26.90%
Gross Profit (ttm): 24.06M
Total Cash (mrq):4.08M  Total Cash Per Share (mrq): .16
Total Debt (mrq): 0.00
Current Ratio (mrq):0.52 , Book Value Per Share (mrq):0.61
52-Week Change: -50.31%
52-Week High (Dec 18, 2015): 4.14 , 52-Week Low (May 27, 2016):1.53
Shares Outstanding: 25.89M , Float: 11.42M
% Held by Insiders:23.57% , % Held by Institutions:47.90%

Short % of Float: 2.54%

Warning: Yes Spark (LOV) offers an asymmetric upside reward. But the company is financially weak. One concern is that if subscribers are lost the value of the brand is damaged, it's progressively less desirable to current and future subscribers. The shift to more mobile technology and marketing cuts presents risk. Additionally, negative Z score, weak sloan ratio,  and F score are not to be ignored. 

Useful graphics taken from the recent Spark's Investor's Presentation on May 1st 2016 available in the 8k. 

Company Highlights

Long LOV