A Letter to Goldmoney Inc. Investors
Dear Goldmoney Investor,
As a value investor, I am generally opposed to commenting on the daily machinations in the market. As Benjamin Graham remarked: “In the short run the market is a voting machine, but in the long run it is a weighing machine.” To that end, what if anything can objectively be “weighed” with respect to a company that was launched just 19 months ago?
Building a great financial services company that is attempting to disrupt money itself is a tall order. It truly is ambition and arrogance squared. Yet, in a somewhat ironic way, it’s also extremely humble given the macroeconomic backdrop. The world is high on an ever-increasing supply of government promises, artificial money, and artificially suppressed interest rates. Cash is being phased out of circulation, and negative interest rates (though they’ve been pushed to the back-burner temporarily) have insidiously become an accepted policy tool for governments to “stimulate” growth.
As a student of history, I fail to recall any prior period where the entire global population self-organized in a manner that was so acquiescent to government and central command. We’ve seen periods with wars, famine, hyperinflations, and poorly conceived social and economic systems in one country or another. However, in every era there was an obvious “lighthouse” economy whether it was the USA in the early 20th century, the UK in the 19th century, France and Netherlands in the 18th and 17th centuries, Spain in the 16th century etc. That lighthouse economy usually operated under a commodity money standard and welcomed decentralized experimentation rather than centralized control of the free market.
Can we honestly refer to any period where every nation operated entirely on fiat money, debt-driven consumption, fiscal and trade deficits, and top down “control” of the business cycle?
The blind faith being placed in governments and central command is manifest in our present era. People everywhere continue to ignore the lessons of hyperinflation, even though all the signs are pointing to this outcome. Coal mine canaries are being ignored whether it’s Venezuela, where cash littered on the streets is deemed worthless or Zimbabwe, Nigeria and South Africa, all of whom have recently experienced some level of hyperinflation over the past two years. Then there is India, where ATM’s are running out of cash, leading to a reversion back to barter.
In his book The Raven of Zurich, Felix Somary, who became one of the richest men in the world having founded the predecessor of Bank Sarasin in Geneva, identifies two indicators that warn of an impending hyperinflation or economic collapse: (1) When governments begin fiddling with the country’s money to manipulate its value; (2) Populism and rising nationalism.
Today we see both political upheaval driven by populism and nationalism as well as unwelcome amounts of government manipulation and control of money. Currently, the population is channeling that anger in the form of hope that a more closed society will result in an economic miracle. These wishful thinkers dismiss mathematical and demographic facts that make any change nothing more than “too little, too late”. In the next phase, foundational commodity and basic goods and service prices will begin to rise and the population will demand a solution. The only peaceful solution, and a time-tested panacea that throughout history been successfully relied upon to restore confidence in the free market is the re-pegging of the currency to gold.
As the world continues to move relentlessly along the same path toward monetary upheaval, new ideas and solutions will be tried, including private market solutions. Bitcoin and Blockchain will likely play an important role, but once hyperinflation rears its ugly head, there is no turning back. Confidence in national currencies can only be restored with interest rates unfettered by government and the re-anchoring of currency to gold — whose physical characteristics have made it the pre-eminent commodity money for 6,000 years.
What happens if we don’t return to gold? This table illustrates the destruction of the purchasing power of the currency in Zimbabwe as hyperinflation took hold from March 2007 to November 2008:
Mission Oriented Company — Goldmoney Inc.
I am writing this missive to share my views on the investment potential of Goldmoney. We have always stated that we are a mission-driven company. Our mission is quite clear: Make gold accessible to all, and enable it to circulate as frictionless as any fiat currency by making Goldmoney the most advanced payments network and money technology.
We set out on that mission exactly 19 months ago. On May 5, 2015 we launched “BitGold” — On May 22, 2015, we acquired Goldmoney, a business founded in 2001 that was both ideologically and technologically aligned with our idea to democratize access to gold. Since that time, we have raised a total of ~$70 million from leading investors.
We have gone from being a group with zero revenue to $140.4 million in the last quarter. A group formed on the basis of an idea, to one generating $2.5-$3.0 million a quarter in gross margin, while maintaining a strong treasury totaling $61mm of liquidity.
A group that operates three distinct business lines: Network, Wealth, and Physical (FKA Schiff Gold), each servicing a niche of what is surely becoming a global financial service business that is with each passing day widening its moat, improving its trust with clients, and increasing the level of engagement.
A brand that continues to grow in clout and daily traffic, recently breaking through the 20,000 mark on Alexa.
When I look at our company and analyze the stock objectively (which I do regularly as the largest investor in the company). I see a business with $61mm in treasury growing at 20% per quarter that is only 19 months old, yet the shares are down 50% from their price in April when the business had half its present revenues. It is noteworthy though that these declines are taking place on extremely low volume compared to our 69 million issued shares. Like me, most investors are focusing on Goldmoney’s future potential.
Most of the capital we have raised came from strategic-oriented investors who are for the most part strong hands and are excited about what we are doing. Some have even been adding to their already large positions. But we also raised money from some hedge funds along the way. One of them has been selling, but their total position was not more than 800k shares at the peak. We also have a sizeable retail shareholder base of circa 4–5 million shares held by thousands of shareholders. I believe they are reacting to the selling (selling begets selling) and to a certain extent, the recent negative sentiment in the USD/Gold price that has seen the gold complex drop at or near the same rates as our shares.
There is this “myth” about our recent fee reduction I keep hearing, but I find that’s really an explanation looking for a problem rather then the actual cause of the share price decline, which in my view is simply an imbalance of selling over buying that is temporary. The fee reduction was explained in our investor letter, which can be read here. It is part of our core strategy for widening our moat with each increase in revenue. In that way we accelerate adoption through organic growth rather than marketing. Last quarter, we spent $700k~ on marketing. If we can reduce our marketing spend by 50%, it will equate to an additional $1.4 million a year of Free Cash Flow or distributable earnings.
It is important to remember that we have three business lines: Network, Wealth, Physical (Schiff Gold), and the fee reduction only applied to Network. Within Network, we still charge a 1% fee for business accounts. Even assuming Network (which is growing at 10–20% a month) sees its revenue decline by 50%, the impact is only $300k a quarter on around $2.5 million of gross margin. At current growth rates, we will likely make up that difference within a quarter and a half and/or with a reduction in marketing expenses. We have consistently stated that the majority of Network profits will flow from the matchbook (bid and offer spread) meaning that over time, with each step function in revenue, we can reduce the commission fees closer to zero. This approach is no different than other disruptor models, including Amazon or even eBay.
Customer sign ups are approaching their all-time high rate. We are adding close to 1,000 users a day, which is at or near our peak rate when we were spending $700k a month on marketing!
Again, thinking as an investor and disregarding the share price activity, I cannot plausibly refer to one metric that is a “smoking gun” indicating failure or deceleration. Moreover, when taking into account the whole package, trading at just $170 million Canadian dollars, with $61 million in treasury, 1.3 million users, $1.75 billion in metal under custody, and $100 million of transaction volume a month, the shares appear to offer exceptional value. This is why over the last ten days, Josh Crumb (Goldmoney Co-Founder) and I have purchased shares in the open market and plan to continue doing so as we believe the margin between the market value and our intrinsic business value is the widest it has ever been since becoming a public company. A good thought experiment to help drive this point across is to consider what our valuation would be as a privately held startup rather than a publicly traded company.
People also seem to forget that our Wealth business can distribute close to $5 million of cash flow a year if we simply decided to stop investing in growth. That cash flow can be used for buy backs or gold-linked dividends. Or to grow the treasury at a rate of 8% per annum compounded. I explained this point on the last quarterly conference call. A company like Franco Nevada, pays an annual gold-linked dividend of circa $90 million and is valued by the market at $10.0 Billion reflecting a gold-linked dividend yield of 1%. All things being equal, the cash-flow earned by Goldmoney Inc. is inexorably linked to the gold price no different than a royalty company like Franco Nevada.
One can also deduce the same by simply adjusting our results by excluding growth and the marketing capital we invest each quarter. Take the Wealth business, almost $5 million a year is derived from risk-free storage revenue. An operation with a basic support staff could run this operation if we decided that was the best usage of our capital.
In summary, I believe the recent decline in the share price to be nothing more than a short-term selloff driven by a low ratio of volume compared to our overall share base. When this selloff ends and the sell imbalance is cured, I suspect the stock will correct back to its prior levels. We are less than 2 years old as a group. So I think we need to look at the market as there to serve us, rather than being overly worried about the daily machinations which are so obviously disconnected at this stage from Goldmoney’s potential.
I recommend you review our latest quarterly investor relations deck which highlights these stats and more: http://www.slideshare.net/GoldmoneyInc/goldmoney-inc-investor-relations-presentation-q2-2017
Also, please peruse our News Room as a lot is going on that isn’t always communicated through investor relation channels: https://www.goldmoney.com/newsroom/news-and-blog/
Thank you for your continued support, trust, and confidence.
This note contains or refers to certain forward-looking information. Forward-looking information can often be identified by forward-looking words such as “anticipate”, “believe”, “expect”, “plan”, “intend”, “estimate”, “may”, “potential” and “will” or similar words suggesting future outcomes, or other expectations, beliefs, plans, objectives, assumptions, intentions or statements about future events or performance. All information other than information regarding historical fact, which addresses activities, events or developments that the Company believes, expects or anticipates will or may occur in the future, is forward-looking information. Forward-looking information does not constitute historical fact but reflects the current expectations the Company regarding future results or events based on information that is currently available. By their nature, forward-looking statements involve numerous assumptions, known and unknown risks and uncertainties, both general and specific, that contribute to the possibility that the predictions, forecasts, projections and other forward-looking information will not occur. Such forward-looking information in this MD&A speak only as of the date of this MD&A. Forward-looking information in this MD&A includes, but is not limited to, statements with respect to: growth of the Company’s business, expected results of operations, acquisition of Schiff Gold Inc., and the market for the Company’s products and services and competitive conditions.
This forward-looking information is based on reasonable assumptions and estimates of management of the Company at the time it was made, and involves known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking information. Such factors include, among others: the Company’s limited operating history; history of operating losses; future capital needs and uncertainty of additional financing; fluctuations in the market price of the Company’s common shares; the effect of government regulation and compliance on the Company and the industry; legal and regulatory change and uncertainty; jurisdictional factors associated with international operations; foreign restrictions on the Company’s operations; product development and rapid technological change;