I initially wrote about GROW on Seeking Alpha when the price was $5.47 (I encourage you all to read it).
Since then, through a series of wild swings, the price hit $8.65 only to drift back down to $6.92 as of today's close.
A lot of what I said in my initial article still stands, so I'll keep this update relatively shorts.
Simply said, I like the stock.
The company's market capitalization is a measly $104MM. By buying the stock at $6.92 you are buying 1 share out of roughly 15,081,849 total shares outstanding. But, when you buy this one share, what are you actually buying?
Understanding what makes up the 1 share in value is really the crux of why I love this stock so much.
Let's dive in:
When you buy the company for $104MM you get:
$12MM in stock GROW owns in various companies
$2MM in accounts receivable that will be turned into cash within 1 year
A building worth a conservative $6MM
Approximately $3MM in cash
Approximately $1.5MM in other, less-liquid investments
Total: 12+2+6+3+1.5 = $24.5MM
So, when you buy the company at $104MM, on day one you are getting back $24.5MM in cash and investments.
But, if you are buying the stock, you are also responsible for paying its liabilities.
So, what are those?
$7MM worth of accrued expenses and tax liabilities.
Great, so you buy GROW at $104MM, you get $24.5MM back, but you are now responsible for $7MM. So, buying the stock at $6.92 means you are actually paying $104MM - 24.5MM + 7MM, or $86.5MM.
But wait, there's more.
GROW used to own 10MM shares of HIVE Blockchain, but sold its stake (after making 10x their money) for $15MM in December, 2020 and reinvested it back into the company in the form of a convertible debenture earning 8% a year.
This is a unique investment that gives GROW investors a floored downside of $15MM and an UNLIMITED upside.
The arrangement was financial wizardry and the market is asleep at the wheel because they haven't picked up on its beauty.
How do I mean? I'll tell ya.
Either HIVE pays back GROW the $15MM in 5 years or the bonds will convert to 6.41MM shares at a price of $3 CAD (Canadian Dollars).
Given that Frank, the CEO of GROW, is the CEO of HIVE, I think it's safe to say he believes in the long-term viability of HIVE as a big crypto player. I bet he'll convert the bonds into shares sometime down the line because he thinks the stock will be worth a hell of a lot more than $3 CAD. Regardless though, if the shares are worthless, HIVE will just pay back the $15MM (plus interest) to GROW (assuming the company isn't bankrupt or something along those lines).
The beauty of the convertible debentures is that as crypto currency and HIVE rise, GROW should in theory rise too. As the shares of HIVE become more valuable, the debentures' convertibility becomes exponentially more valuable.
For some reason the market just doesn't see this incredible investment.
Let's go through a thought exercise.
Right now - as we mentioned - when you buy GROW you don't actually pay $104MM for the company, but rather you pay $86.5MM because you get all the fun receivables, investments, and cash along with it.
Well, what about the HIVE debentures?
Your floor value is $15MM, because that's what HIVE owes GROW. So on a worst case scenario, you are really paying $86.5MM - $15MM, or $71.5MM for the whole company. But, given that HIVE is trading at $4.41 CAD - what are the $15MM debentures now worth if they convert?
Remember, they convert at $3 CAD, which is $2.34 USD. $15MM/$2.34 is 6.41MM shares. 6.41MM shares at $4.41 CAD (or $3.44 USD assuming the conversion rate stays consistent) is $22MM USD.
So, right off the bat, the debentures are worth $22MM, not $15MM.
Granted, the price of HIVE fluctuates everyday and Frank likely won't convert them anytime soon. But, in a perfect world, the GROW share price should reflect the change in value of the HIVE debentures.
Let's take it one step further.
What if HIVE goes back to $6.80 CAD where it traded at just 6 weeks ago? What would the debentures be worth?
$34MM USD.
Damn!
What if HIVE goes to $10 CAD in a year?
Debenture value? $50MM
Yea, like I said - it's financial wizardry.
Okay, back to reality.
So worst case scenario we are paying $71.5MM for the business. So, what are we buying?
Well, they get 8% on their debentures so that's $1.2MM, their famous JETS ETF is bringing in about $22MM on an annualized basis, their mutual funds bring in $3MM in revenue, and they have another small ETF that brings in about $0.5MM.
And, they have about $10MM in expenses on an annual basis.
Total
Revenue: $25.7MM
Expenses: $10MM
Income: $15.7MM
So, to earn $15.7MM in income you are paying $71.5MM - a 21.95% earnings yield.
But, that's using the downside scenario.
I personally believe HIVE could end up in the $7-$10 CAD over the next year or so as crypto gains steam. I also think the income from JETS will be closer to $24MM-$25MM as people continue to bet on a return to normal trade.
And, to top it all off...
They own 5MM warrants in HIVE that can be used to purchase common stock at a conversion price of $3 CAD.
Wait, what are those worth?
Long answer, they are hard to value.
Short answer though is that they are at least worth the current share price of HIVE minus the exercise price ($4.41 CAD - $3 CAD) multiplied by 5MM and converted back into USD.
i.e. $5.499MM USD when HIVE is at $4.41 CAD, $14.82 USD when HIVE is at $6.80 CAD, and $27.3MM when HIVE is at $10 CAD.
So, putting it all together. You are paying a true price/earnings ratio of 4.55 ($71.5MM/$15.7MM) if everything stays remotely constant.
A 4.55 P/E is a bargain in and of itself. But, the beauty is that you get all the insane upside of the HIVE debentures and warrants (potentially worth $50MM+ USD if HIVE takes off) FOR FREE!
I think this stock should be at least 2x higher to where it is right now.
Disclaimer: Not investment advice.
Also Disclaimer: I own a lot of GROW.