Zedge Is Falling By The Wayside
Zedge (NYSE:ZDGE) was an interesting play on tech back in the days of cheap debt and economic stimulus but those days are over. Looking at this stock from our new perspective, debt is getting more and more expensive, and the business is ultra-exposed to consumer trends.
Consumer spending is getting crushed under the influence of inflation and that situation is only going to get worse and oil prices are cutting into spending as well.
Gasoline is above $5 nationally and heading higher; we don’t think this is going to free up any extra dollars for fancy ringtones and other cell-phone-personalizing gimmicks.
The takeaway is that Zedge's growth story is over and there is a great risk the company could wither away to obscurity among its many, many competitors.
Zedge Falls On Slowing Growth
The worst part of Zedge’s story of slowing growth is that business never ever really picked up the way that it was supposed to. The company peaked out at $6.9 million in quarterly revenue last quarter and now a sequential slowdown is in effect.
The company reported $6.23 million in revenue this quarter, up 18.7% from last year, but this is down 10.1% sequentially and YOY growth decelerated by 40%.
The good news is that revenue beat the Marketbeat.com consensus estimate by 1500 basis points but the strength was not enough to offset margin compression experienced over the last year.
Zedge reported operating margin contracted by 1620 basis points versus last year to leave the GAAP earnings below consensus. The GAAP $0.05 is down from last year’s $0.13 and missed the consensus by $0.02 but there is some good news to be shared.
The company’s adjusted EBITDA margin increased but primarily due to pricing increases. The monthly average users are falling as are the net subscribers; we don't view this as fundamentally healthy for the business.
"We remain cautiously optimistic about our fourth quarter as MAU trends have been moving in the right direction to date. We also expect a number of product enhancements to be released in June including most of the new social and community features for the Zedge app that was delayed by the AppLovin transition…Given the timing of these introductions, and the consolidation of a full quarter of GuruShots results, we are adjusting our revenue guidance for the fiscal year 2022 to over 30% growth as we expect to realize the bulk of these benefits in fiscal 2023,” says CEO Jonathon Reich.
No Support For Zedge
When it comes to the sell-side community, Zedge has virtually no support. There are two analysts with ratings, that are more than 0, but the most recent commentary is 60-days old and came with a Buy rating that we don’t agree with.
The other commentary is going on 12-months old and is irrelevant to us. On the institutional side, the institutions own about 24% of the stock which isn’t that much and we don’t think these results will change the situation.
Turning to the chart, it looks like Zedge’s downtrend is gaining momentum. The price action fell more than 10% in the wake of the report and confirmed resistance at the short-term EMA.
The drop also set a new low and triggered bearish signals in the indicators. The indicators are showing bearish continuation signals that could easily keep price action at the current level if not moving lower.
A move lower would be very bearish and could take price action back to the pre-pandemic range of sub-$2.00.
