Shares of Troika Media Group (NASDAQ: TRKA) experienced a significant spike of over 30% on Monday. The spike was driven by unusual retail interest. The trading volume surpassed 100,000 million trades by lunchtime, indicating heightened attention from individual investors.
The Fleeting Nature of Social Media-Based Investor Trends
Typically, I would dismiss such market movements, considering the fleeting nature of social media-based investor trends. Previous instances have shown that the enthusiasm of these investors tends to wane quickly, as seen in the case highlighted by CNBC reporters in 2021.
Many popular stocks have already lost momentum this year. An example is BigBear.ai Holdings (NYSE: BBAI), which has given up half its January 2023 gains. By the time meme stocks gain widespread attention, it is often too late to make profitable investments.
Troika Media Group: A Potential Lasting Winner
However, Troika Media Group stands out from the rest. This time, the retail crowd may have discovered a lasting winner in the stock market.
trka stock: A Diamond in the Rough
Troika Media Group emerged from an ordinary reverse merger, which took place in March 2022. The shell company acquired Converge Direct, a media and marketing firm that generated $23 million in adjusted EBITDA in 2021.
With the integration complete, the company is expected to achieve approximately $22.8 million in operating profits. Sadiq (Sid) Toama, the former chief operating officer of Converge, has assumed the role of Troika Media’s CEO.
Mispricing in the Market
In private markets, companies like Converge Direct typically command valuations ranging from 4x to 6x EV/EBIT. In public markets, these valuation multiples expand to 5x to 10x EV/EBIT due to the stability of the digital customer acquisition industry. Converge Direct’s reverse merger with Troika Media valued the business at $125 million, representing a 5.6x EV/EBIT multiple.
However, the market has significantly mispriced Troika Media’s stock. Since the acquisition, the share price has plummeted from $1 in March 2022 to 10 cents. Even at its current price of 40 cents, trka stock market capitalization stands at a mere $60 million. The market capitalization indicates a rock-bottom 2.6x EV/EBIT multiple. This situation presents an opportunity for investors. Troika Media Group could be one of the most undervalued penny stocks of the year.
trka stock Potential
Although Troika Media’s stock faces high short interest, deterring institutional investors, value investors find trka stock attractive. By delving into the company’s fundamentals, they recognize that Troika has the potential to earn up to $35.8 million in operating earnings by 2024. The potential is thanks to its acquisition of Converge Direct. Despite approximately $65 million in long-term debt resulting from the leveraged buyout. Troika’s current share price of 40 cents is remarkably undervalued.
Assessing Troika Media’s Value
In an optimistic scenario, a three-stage dividend discount model based on sell-side estimates places the company’s value at $13 per share. This signifies a great 32x upside. Considering the perpetual annual free cash flow of $44 million from a service-based firm and accounting for interest rates and bankruptcy risk, the valuation appears reasonable.
Taking a more conservative stance, assuming sell-side analysts are overly optimistic. A free cash flow capped at $18 million per year and a 35% probability of failure yields an equity value of $360 million. This value is equivalent to $5.30 per share. This valuation still reflects a fair premium for Converge Direct’s shares.
In the worst-case scenario, Troika is exposed as a scam. The downside would be limited to 40 cents per share. Combining the probabilities of these scenarios, the final fair value of $4.70 suggests that retail investors may have identified a significant opportunity.
Risks Associated with trka stock
Investing in a stock like Troika Media comes with considerable risks despite the potential for substantial returns.
Firstly, the estimated fair value of $4.70 represents an expected value with a significant risk of total loss. Reverse-merger companies like Troika Media tend to be risky. This is because successful startups typically opt for standard IPOs instead of backdoor mergers.
Additionally, the figures reported by Converge Direct may be self-serving and designed to present an overly positive image. Metrics like “adjusted EBITDA” often raise concerns, as they frequently exclude unprofitable elements. This exclusion may result in overestimating the $18 million in projected free cash flow.
Lastly, Troika’s status as a penny stock puts trka stock at risk of delisting. As a relatively small company with around 150 employees, the disappearance of Troika would likely go unnoticed by many.
Nevertheless, the current share price of 40 cents fails to acknowledge the profit potential. The potential is resulting from Troika’s acquisition of Converge Direct. This time, social media investors may have discovered a stock with the potential for a remarkable 1,000% gain.
InvestorPlace’s Stance on Penny Stocks and Low-Volume Stocks
It’s worth noting that InvestorPlace generally refrains from publishing commentary on stocks with a market capitalization below $100 million. They also avoid publishing commentary on stocks that trade less than 100,000 shares daily. These “penny stocks” often attract scam artists and market manipulators. However, if commentary on low-volume stocks is published. InvestorPlace writers must disclose this information and warn readers of the associated risks.