Support.com SPRT: a rollercoaster ride from call centre net-net with NOL carry-forwards, to volatile crypto meme stock
Support.com (SPRT) is a dotcom bust stock: I purchased in May-21, when the residual parts of it were operating as a remote broadband support call centre. At the time, it was a Ben Graham net-net: in Mar-21 it had current assets of $36.5M (of which $26M was cash and short term investments, $10M was accounts receivable and prepaid expenses), and it had total liabilities of $4.9M, so net current asset value (NCAV) was $31.5M.
The stock price was $1.23 with 19.5M shares outstanding, so market cap. was $24M, giving a margin of safety of 1-(24/31.5) = 24%. Support.com SPRT was essentially a broadband support call centre, with an entirely remote workforce. Since there was no inventory, I consider the current assets to be worth 100% of their book value.
Support.com SPRT was floated in 1995, and carried large net operating loss carry-forwards from it’s early days: a retained loss of ~$208M as of March-2021. It could not be taken over without diluting the acquirer due to a tax preservation plan adopted in 2019. It was marginally profitable and had a caretaker CEO called Rick Bloom. There were some indications that the board was looking to maximise shareholder value: e.g. after a capital allocation review in 2019, a special dividend of $1/share was paid in Dec-19 to return excess capital. All in all, it looked like a promisin net-net, so I took a position in mid-May 2020.
This investment had two distinct phases:
1. Support.com SPRT net-net work-out
The company started to recruit a new executive team in the months following:
Lance Rosenzweig (new CEO) (Aug-20) (PeopleSoft CEO and co-founder)
Christine Kowalczyk (COO) and Bobby Brown (CSO) (Sep-20)
Caroline Rook (Oct-20) (former PeopleSoft CFO)
These people were extremely experienced at running large public corporations. In retrospect, their involvement indicated that they saw a substantial opportunity in Support.com: but I did not realise this at the time.
By Oct-20, the share price had risen to $2.31: or an 87% unrealised return – however I did not sell because I follow the strategy to hold it for a year at least before selling.
To read more about the strategy of net-net investing: see our article on net-nets here.
2. Merger of Support.com SPRT with Greenidge Generation
On 23rd March 2021, Greenidge Generation, a natural gas power plant which was in the process of setting up a Bitcoin mining operation, announced a merger with Support.com SPRT. The intention was to be the first Bitcoin mining company which would be vertically integrated, i.e. wholly own the electricity generating assets to power the mining. Support.com would also bring $38M cash, plus the significant NOL carry-forwards into the combined entity, worth considerably more than the cash itself.
Upon the merger announcement, the share price spiked to over $9 intraday, with 282M shares traded: this was 3500x the prior normal volume. Over the next few months the share price drifted down to a low around $2.50. Then in Jul-21, a peak to ~$9 was reached again, and then in mid-Aug-21, the stock started to be discussed on various popular speculative forums, e.g. Reddit, WallStreetBets etc, and entered the public consciousness through news articles.
Volume and share price increased significantly and the share price started to have regular 30%+ intraday swings. The stock was also extensively sold short: with over 50% of the float sold short at some points. A share price peak of over $50 was reached at one point, with a >100% gain in one day – there may have a been a short squeeze which caused this.
The share price volatility and level indicated wild speculation. Having accidentally come into the position of holding shares in a soon-to-be Bitcoin miner, and not wishing to speculate on Bitcoin mining, I started to sell my holdings during August in multiple tranches, as the share price increased, realising an average price of $16.85, or 1270% return on my initial investment over a 15 month period.
As of writing on 14-September-21, the merger has been approved by the Support.com shareholders, and the merger company will begin trading tomorrow (15th Sep-2021) under the symbol GREE on Nasdaq.
Learning from this experience:
1. Net-nets sometimes resolve in unexpected ways: nobody could have predicted the Greenidge merger: however when the stock was initially purchased, there was very strong downside protection, and potential upside in the good margin of safety in the balance sheet when the stock was purchased, and other good signs, e.g. capital allocation policy, net operating loss carry-forwards, etc as discussed above. Therefore there was little to lose, and a good potential upside.
2. How to maximise profit from a speculative meme stock: the wild swings in price in Aug-21 were unpredictable. Although my average price was about 1/3 of the maximum high share price reached, the approach taken was to sell tranches of shares at the price rose, because at the time it was not possible to see whether there would be any further rises or not.
This stock was purely speculative at this point: if the company was a fundamentally strong company with a good future, I might have held onto it, but this was not the case: meme stocks, especially when combined with Bitcoin mining are very speculative.
3. Holding for the initial minimum 1 year period: this is a discipline I apply when purchasing net-nets, which in this case proved to be very helpful in realising the maximum profit from the stock
4. Portfolio allocation: This net-net was purchased in May-20 when many companies had fallen in value due to the Covid pandemic. I allocated at the time, about 9% of my portfolio to it, but in retrospect, should have allocated much more due to the high margin of safety and other good characteristics making it a promising net net. With very little downside risk, a larger investment would have been better. I am willing to allocate up to 50% of my portfolio to a single stock and have done so in the last year.
5. Time, energy and effort spent are much higher for speculative stocks: In order to decide what to do with the stock, I devoted a fair amount of time and energy to watching the share price and news developments to decide when to sell – this was not a desirable long-term situation and confirms my preference for value stocks over speculative stocks: it is too distracting to have to do all of the daily monitoring.
6. Reflection on: ‘sunk-cost,’ analysis, and when to sell: If you had a pile of cash sitting on the table instead of the stock that you hold: would you go out and buy the stock that you hold again? If the answer is no – then why would you continue to hold it? Mr Market (as defined by Ben Graham) offers an opportunity and price to sell at every day – so every day the stock is held, it can thought that you are making the decision to buy it again.
For me in the case of Support.com SPRT, once the share price reached greater than book value, the answer would definitely be that it would not be purchased if I did not already hold it since it was a weak business. This is especially true once it starts trading in a volatile way due to speculation.
7. Extension of normal selling period: Normally I would hold a net-net for a year then sell: due to the merger announcement I decided to wait until that was completed, knowing that volatility was likely due to the link to Bitcoin, although I did not anticipate it becoming a meme stock. I eventually sold prior to the merger, when the share price speculation grew extreme and the share price went up significantly.
If it were not a net-net, I would hold until I had a better idea. In this case, I sold because i) the best returns in net nets are to be obtained when held for a limited period, ii) I believe that Bitcoin mining is very speculative, and do not want to be part of that for the long term, iii) when it became a meme stock I thought it could easily be overvalued, and iv) I have an ethical problem with fossil fuels to mine Bitcoin, due to to climate change.
If you the reader, have any comments or perspectives on this piece or Support.com, please use the contact form to get in touch, it would be great to hear from you.
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