RE:RE:RE:RE:RE:Poor top and bottom-line with low and shirking margins. For me to explain my thesis, I would have to write about 10 pages. I tract the whole sector and see what is happening at the macro level and then look at the specific performance of companies. In this sector, I see alarming recklessness and similarities that were present during the tech bubble. A few years ago VLNS was one of the best-managed companies in the sector till their business model failed. They were also one of the few investor-friendly companies in the sector. They had unbelievable margins and a very tight float. It was a company to buy and hold at that time. Not anymore. It is still a good trading stock and is not that investor-friendly. By timing, the share price one can still make good money till they sought out their business model.
They are trying to reinvent themselves like other manufacturing companies in the sector. NEPT came out with financials yesterday. They are trying to diversify and are burning massive amounts of cash that are not sustainable. They generated a revenue of $6.68 million against a loss of $24.8m. For tiny revenue, they lost a massive amount of money. Their plan is clearly not working out. NEPT, LABS, and similar companies are on the death clock and may have a year or two to make their new business model work. All these companies including VLSN are in desperate need of revenues or their stock price will further drop.
VLNS is in a different category and much better shape it has a superior track record and a much better plan. The issue is that because of the collapse of revenues the company is in a bind and they are going out to buy revenues in a rush. When the sector is in a bubble and everyone is buying revenues which forces all buyers to overpay for revenues. The bigger problem is that it is not only the overpayment that has to eventually be written off these new acquisitions put the additional financial burden for years because they are loss incurring entities and bleeding continues.
VLNS has very low margins will they increase with scale? In principle yes. How long will it take ? It is not going to happen in the next 4 quarters because the margins are too low, competition too strong and they are coming out with massive new products, they have parterres that split the margins or are paying big royalties. Some of these new SKUs will result in dead inventory. It costs lot of money to test and introduce new products. Some of them will be a total failure at a big cost. USA legalization can take up to 2 years.
When you are burning cash yourself and buy other money-losing companies you’re are adding to your burn rate and creating more financial problems for the company. Paid a big price for those revenues and will continue to pay till the bleeding stops. VLNS is expanding with multiple properties and products. While there are efficiencies/economies of scale only when the volumes are big but with Mickey mouse units and keeping the old bosses with salaries, the operating costs may not come down and will result in other management issues too.
I feel that the losses of VLNS will increase and this company will need to raise more money to cover those losses in the future.