CUP – Cupid shoots itself in the foot

Ah yes, online dating agency Cupid. ExpectingValue did an excellent write-up on CUP (Cupid), so you should read his post to get a good overview. I responded on his tweet that his post was interesting, and he tweeted me back: “Thanks Mark – drop me a comment if you have any opinions, right up your street I would’ve thought!”

Arrgh. Well, how could I resist?

I’d start by saying that this is a tough tough call. On that basis I would not get involved.

Here’s a grab-bag of sketch notes that I put together on CUP.

But there are some intriguing things to discuss. CUP is on a PE of 5 and a PFCF of 7.5, and it has plenty of cash. It is cheap on standard valuation metrics. It scores A+ on the Stockopedia Magic Formula score, and passes their “Neglected Firms” screen. It’s z-score is excellent, and the M-score is not flagging up any earnings manipulation risk. Revenue forecasts are robust – so far, anyway.

Looking at the Alexa site, the estimated percentage of global internet users who visit cupid.com is up 120% over 3 months. For the latest-announced finals, established markets (UK, Autstralia, New Zealand, Ireland, South Africa) account for £34.9m out of total revenues of £80.9m.

A little internet search revealed an article by the BBC from late 2005:

US dating agencies sued for fraud: Two major online dating agencies are being sued for alleged fraud and malpractice in the United States. Match.com has been accused of sending bogus emails to clients and using their own staff to attend some dates – the practice known as “date bait”. A separate lawsuit involves Yahoo’s personal service.

So general dubious practices have existed in a variety of forms for a long time.

CUP invites comparisons to companies like CPP (CPP Group), PTEC (Playtech), TALK (TalkTalk), HLF (Herbalife), HSV (Homeserve), SGP (Supergroup).

Some recent RNS’s:
08 Apr: Notification of Major Interest in Shares: Tosca Mid Cap fund, whoever they are, takes their holding above 5% to 8.5%
28 Mar: Change of Adviser: Peel Hunt becomes the Company’s nominated advisor and sole corporate broker
26 Mar: Notification of Major Interest in Shares: William Currie and Iain McDonald take their holdings below 5% to 4.5%
25 Mar: Comment re press speculation and trading update: refutes allegations, states that revenues are more than 20% higher than in the same period last year
22 Mar: Comment re press speculation: confirms employment of motivation team, but they do not communicate with free members. Commissioned and independent audit by one of the big four accounting firms
08 Mar: Chief Executive Bill Dobbie buys 850k shares at 114.11p, which is roughly £950k

Some interesting things going on there. The change of advisor looks “tricky” to me; but on the other hand director purchases look positive, and the commissioning of the independent audit probably indicates that the directors are confident that there are no skeletons to come out of the woodwork.

For interest’s sake, let’s take a look at HLF (Herbalife) over the last year:

A is where the Bill Ackman short was announced. Look at the big plunge to B. If you had caught things right, you would have made a great return. Notice that’s an if, though. If you had missed the bottom, the chances are that you bought at the wrong level, and obtained only mediocre returns. So be warned. I’ve observed it to be a fairly typical pattern that if you missed a critical buy point, a re-rating of the shares is far from guaranteed.

Let’s turn to CUP’s graph, this time by the good folk over at Stockopedia

See how you’ve missed the bottom? There was a sharp rebound, and now they are trending lower. If you had gotten in at the low (38p according to Google), now would be a good time to book profits. In fact, even if you are making a loss, now is probably a good time to take it.

I see an added danger to the chart, in that there is a risk that we could see a sudden fall in the share price back down below 60p. There’s a downtrend, and when people realise that a return to higher levels is looking increasingly unlikely, they will dump the stock. Maybe it wont make it down to 38p, but I think there is precedent, from other companies in similar situations, of sudden drops. The little platform it has built at around 80p has lasted about a month, and shares fell 2.6% today. So, if I were to hazard a guess when we can expect another sell-off, my guess is: any day now.

I suggest that a safer way to play this stock if you still believe in the bull case (an personally, I’m sceptical), is to “do a Supergroup”. Let’s look at its chart:

If you were quick off the mark, you could have inspected their prelims on 12-Jul-2012, confirmed that everything was OK, and bought in at 385p, maybe. But let’s say you had a slow trigger finger, and bought in at the spike of 491.5p with atrocious timing. Shares are currently 670p, and you’d be up 36% in a period of less than a year. Pretty good.

So, to summarise, I’m not happy with the investment case, but if you’re still interested in potential upside, I think the best strategy would be to sit on the sidelines and assess any updates. Look to see how the market reacts to the news, too. On a trading update, I would be looking to revenues that were at least 10% higher than comparables, as well as a confident outlook by directors that would suggest that double-digit revenue growth is on the cards.

Just my 2 cents. I could be completely, utterly, absolutely wrong.

But it’s fun to see how the situation develops.

76.92p. ASX 3297.

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About mcturra2000

Computer programmer living in Scotland.
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2 Responses to CUP – Cupid shoots itself in the foot

  1. Lewis says:

    Thanks Mark,

    Different angle from me!

    “Looking at the Alexa site, the estimated percentage of global internet users who visit cupid.com is up 120% over 3 months. For the latest-announced finals, established markets (UK, Autstralia, New Zealand, Ireland, South Africa) account for £34.9m out of total revenues of £80.9m.”

    I hadn’t thought about this.. as you’d probably guessed from my blog and my attempt at Google trends I quite like off-the-beaten-track ways of analysing things, and traffic rankings seem like they should have a reasonable (though perhaps not massive) correlation with subscriber numbers.

    Didn’t know the industry had such a dubious past, either!

    Can’t comment on the technicals, but won’t disagree that today’s price is certainly a lot less attractive than that 38p, if you had the stomach for it..

  2. Sidekick says:

    I made some very nice money in SGP when the shares tanked but think CUP presents a lot more risk. Lots of negative reviews about them on Google, even if they aren’t doing anything illegal I’m not completely happy with their practices, and if any regulation is brought in to tackle it it could hurt their profits.

    Very tempting given their growth and PE ratio though, I’d expect the shares to do well over the next year or two but too much risk of the government stepping in and stopping the party imo

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