The Curious Case of Model N

When I started buying GOGO at $11.5, I was researching MODN too. On paper, it’s so cheap!

The company came public and its stock ran up into the mid 20’s, amidst widespread praise and adulation from the media. However, something went awry at MODN, awfully quick, and it was reflected in their staggering earnings shortfall.

They were supposed to do 25-26 mill for the quarter, but instead did $21 mill. Analysts were pissed and threw the company under a bus. During the conference call, the CEO said it was a matter of not being able to “close deals.” He insisted that the company didn’t lose any clients and were refocused on finding a new sales manager to right the ship.

I gotta say, it sounded like a bunch of BS to me. The company guided down for the next year, not just 1 or two quarters. They went from profitability to potentially burning through $20 mill over the next 12 months.

In my estimation, the real problem is growing pains. Ironically, the company is in the business of helping life science’s companies manage their top and bottom lines more efficiently. But they managed to over-expand, and as a result, have many, many disgruntled workers leaving scathing reviews on Glassdoor.

They paint a picture of middle management anarchy run amok, something reminiscent of the movie Office Space. Upper management seems to be unable to motivate people, and as a result, performance and productivity have suffered.

None of what I said sounds good and certainly not a reason to buy the stock. However, the company has over $100 million in cash, equating to 50% of its market cap. The p/s ratio is in the league of ZNGA and is 60% cheap, when compared to other companies in the SAAS space. Providing management can right this ship, this stock will make a bee-line for $20.

If management continues to fail, I am almost certain this stock will be a feasting ground for activist shareholders, demanding change, clamoring over the strong cash backstop.

In summary, MODN sucks, but I took a position nonetheless.