FingerMotion: The Bear Case Is Playing Out (Rating Downgrade)

seekingalpha09-25

FingerMotion's core telecom business collapsed, and new businesses are not able to make up the shortfall.The company is facing a cash crunch, and historically, management has issued shares to fund the...

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(NASDAQ:FNGR). I previously rated FingerMotion a sell for the following reasons:  I saw too much potential to rate it a sell and too much risk to rate it a buy  On the sell side, the core business continued to struggle and pressure cash flow quarter after quarter On the buy side, political risk was easing, and two growth businesses had significant potential.  Since then, FingerMotion is down 34% while the S&P 500 is up 7%.   FNGR Price Trend (TrendSpider) Unfortunately, it looks like the bear case, risk scenario I discussed is playing out. FingerMotion's telecom business went off the rails, falling from $12 million to near zero, with the SMS & MMS business picking up about 2/3 of that. In addition, the big data business went to zero and little revenue is coming through from growth. The company is almost out of cash again and has historically been financed by issuing stock and diluting shareholders. The one growing business driving 90%+ of revenue is also entirely reliant on third parties. Unless everything goes perfectly in the next few quarters, shareholders have little chance of seeing a return. I lower my rating on FingerMotion from hold to strong sell. Cash Crunch Keeps Diluting Shareholders From 2017 through now, FingerMotion has yet to drive profit. In addition, operating cash flow has continued to get worse as net income drops and net operating assets fall further. The company made worrying working capital choices over the last two periods as accounts payable turned sharply positive financing some of the loss.   Cash Flow From Operating Activities (Seeking Alpha) Each time the cash balance dips, the company has historically issued common stock. The last issuance worth $12.1 million in 2023 has already run out. Given the low share price, this presents a high risk to investors as the share issuance would have to be significant. Debt financing at current interest rates is not a much better scenario, if they could even get financing approved.   Cash Flow From Financing (Seeking Alpha) Given the cash crunch, I would have expected some type of cost control, but I actually saw the opposite as G&A expenses rose 38%, driven by a 26% increase in salaries & wages and \"other\" more than doubling. As management continuously discussed the new lines of business were more profitable, on top of a cash crunch, I question the significant increase in discretionary spending.   G&A Expenses (FNGR Investor Relations) Contract Revenue Isn't Coming Through FingerMotion has had several big announcements over the last few years, including the following:  Expanding usage of the Da Ge app by partnering with Jiangsu YKC and Shanghai Anyo Charging Technology Co., Ltd to allow consumers to use more than 400,000 electric vehicle stations Partnership between Sapientus (FNGR's big data platform) and Pacific Life Re for insurance valuation Partnership between Sapientus and Munich Re to model morbidity and behavioral patterns  Despite this, the collective revenue impact of these businesses can't be more than $211,000. The big data segment has fallen to no revenue recorded, and telecom products and services combined is down to the remaining $211,000.   Revenue By Segment (FNGR Investor Relations) Management stated in the earnings release that these businesses would contribute \"meaningful\" revenue by the end of the year, but after three years of promises and a very challenging revenue story coming into fiscal 2025, I do not believe this can be relied on. Growth Business Relies On Third Parties The one growing business, SMS & MMS, now represents 97% of the business and is entirely reliant on 3rd parties. This is challenging for a couple of reasons beyond just diversification. First, the margin is not great despite with management may be saying in earnings. In the last reported quarter, SMS ran at a 6% gross margin, barely better than the 4% margin of the business it is exiting.   Cost of revenue by segment (FNGR Investor Relations) This is also a heavily fragmented industry with relatively low barriers to entry. The 9 providers shown below from 2023 are largely indistinguishable from one another, and this list doesn't even include FingerMotion's company.   Fragmented SMS Providers (SMS Comparison) This product also operates entirely using 3rd party telecom provider networks, not on FingerMotion's assets. This leaves the business, and its profitability, subject to market pricing, the willingness of telecoms to sell access at desired quantities, and the risk of outbid or pushed out by exclusivity deals. Upside Potential The upside potential for FingerMotion is that the growth businesses start to take hold, either Da Ge or Sapientus, and rapidly scale revenue while also generating positive cash flow to prevent further dilution. I ran a scenario on what would be required to be at breakeven by the end of the year, and it requires a 57% growth rate quarter over quarter.   Break-even projection (Data: Seeking Alpha; Analysis: Mike Dion) Generating a million dollars of profit to start refilling cash balance requires a 75% quarter-over-quarter growth rate.   Profit projection (Data: Seeking Alpha; Analysis: Mike Dion) Outside of a brief period in 2022, FingerMotion has not grown near this rate, making this upside possible but highly unlikely. Verdict FingerMotion's core business fell nearly to zero in the prior period and alternative businesses only covered 2/3 of the loss. The business is nearing another cash flow crunch that is likely to dilute investors further based on prior management decisions. In addition, promised new business growth and compelling partnerships have not resulted in revenue as the most promising big data business fell to zero. Most surprisingly, in light of business challenges, management increased discretionary expenses by 38% instead of preserving cash flow while growth businesses hopefully catch up. While there is a small potential for growth if nearly everything goes right for FingerMotion, time is not on their side as the business falls out from under them with new revenue on an unclear timeline.  I lower my rating on FingerMotion from hold to strong sell.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2470235632"}