Zedge, Inc. (ZDGE), a New York company founded in 2008, is an online database for artists to create and sell content. This content is in the form of digital images, video wallpapers, audio files, ringtones, and more. The app allows artists to get e-commerce exposure and profit off their creations. The app can be described as a more digital art-focused version of RedBubble.
The company has seen significant growth over the last two months as it recovers from its losses incurred earlier in the year. Catalysts such as a very strong balance sheet and the announcement of a new “Refer a Friend” campaign have driven the company’s recent success. However, at this point, the company is not a buy as it has shown decreasing net income over the last four years and is extremely overbought at the current moment.
Zedge, Inc. has a very strong balance sheet. The balance sheet is highlighted by a current ratio of 3.4. The company also has no long-term liabilities. These factors give Zedge financial freedom to invest in its growth moving forward. This investment in growth has begun with their new “Refer a Friend” campaign. This new program is in its beta period as of right now but gives the company great growth prospects moving forward. The “Refer a Friend” program will reward the artists who refer the most friends over a given time period with free in-app advertising and promotion across Zedge’s social media platforms. This new campaign gives incentive for current users to add new members and increase the user base for Zedge.
Zedge, Inc. makes approximately 90% of its current revenue from in-app advertisements. Zedge’s content is divided between simple designs and Zedge Premium, which are higher quality creations. In order to access the content in Zedge Premium users must watch an advertisement or use “Zedge coins” to skip the add. These Zedge coins are earned by watching advertisements or can be bought in app. An increase in user base, which should be expected due to the “Refer a Friend” program, should lead to an increase in revenue as more people will be accessing the premium content.
In fiscal year 2018, Zedge has experienced a 22.5% increase in monthly active users (MAU) in emerging markets, but a decrease in users from well-developed regions of 8.3%. This is a bad sign, as the well-developed regions have much higher advertising rates than the emerging markets. This shift toward more MAU from emerging markets decreases Zedge’s profitability. Zedge anticipates that new programs such as “Refer a Friend” will increase the amount of MAU, especially in the more profitable well-developed regions. Overall, MAU increased by 6.3% in fiscal 2018 which ended on July 31st. The total MAU reported on July 31st was 34.1 million.
From a technical perspective, this stock is not at a buying price currently. Its Relative Strength Index (RSI) of 82 indicates that the stock is very overbought. The stock has also featured eight positive days in a row so the buying position has seemingly passed. In order for this stock to reach a new buying position, I would like to see it produce a cup and handle shape. The cup has already been formed, as shown in the chart by the bowl shape produced ever since the stock reached a new high of $4.34 on April 26th. A handle would be depicted by a downtrend over the next week or so in which the stock dips down to approximately $2.50-$2.80. If we see a price drop we may find a good new buying position.
This stock has good growth potential moving forward, as Zedge is making an effort to increase MAU through their “Refer a Friend” program. The company’s comfortable financial position featuring no long-term debt and a strong current ratio give it the freedom to invest in its growth. I believe that we will not be overly impressed by the quarterly report that will be released on December 11th as this report will not include the progress that could be gained by the “Refer a Friend” program. However, this earnings report could act as a deterrent to many investors and give us an ideal buying price for a stock with a strong balance sheet and good growth prospects. I feel that if bought after a discouraging December 11th earnings report, this stock could reward investors in the second half of fiscal year 2019.