MarketWise, Inc. (MKTW) Research Notes
Unveiling the Dramatic Clash between Founders and Management
DISCLAIMER: The views here are a codification of how I am thinking about this company and the interesting aspects of the potential loss or gain that can take place. These are highly risky. At anytime I maybe invested and this should never be considered investment advice. Consult your financial advisor or who ever you work with on your own personal investment decisions.
Explore the intriguing story of MarketWise, Inc. (MKTW 0.00%↑), an $85+ million market cap company, as we delve into the internal struggles between the original founder, Frank Porter Stansberry, and the new management. Discover the reasons behind the recent decline in stock value and the controversial events surrounding the company's IPO. Gain insights into the grievances expressed by Stansberry and the intricate details of the SPAC merger. Uncover the impact on shareholders and the potential consequences for MarketWise's future. Join us on this gripping journey through the challenges and uncertainties faced by a prominent player in the financial research industry.
This company provides retail investors with subscription services for financial research, software, education, and other tools intent on helping to navigate the financial markets and generate investment/trading ideas.
MKTW recently hit a one year low of $1.45 on April 19, 2023 with a declining trading range from $2.09 to $1.53 during mid-Feb to mid-May 2023. Management mostly attributes this to the year over year Q1 loss of subscriptions by 14.5% along with total revenue loss of 7.7%.
But on the heels of the company since they have gone public via SPAC, has been a thorny unfolding drama taking place between the original founder Frank Porter Stansberry and old management. Amber Lee Mason was appointed CEO February 2023 after “…Mark Arnold has resigned as Chairman of the Board of Directors and Chief Executive Officer of MarketWise, and as a director of MarketWise” on November 23rd 2022 that was effective immediately. MKTW stated,
With some digging you find Mr. Stansberry’s 13D filings ( 1 , 2 , 3 ) appended with some interesting letters ( 1 , 2 ) reading more as letters of grievances.
Some of the statements made in the letter:
Our very first newsletter, my own Stansberry’s Investment Advisory, was published in August of 1999. It recommended shorting shares of AT&T (the old long-distance company) because the year prior it invested over $100 billion in technologically obsolete coaxial cable networks, an investment I believed would doom the company as new technologies (like CDMA wireless and high speed ethernet) became more widely adopted.
As you may remember, I was right.
That’s why the company was called Stansberry Holdings: it was my business.
Why would I agree to leave the company I founded, nurtured, and built into a juggernaut?
Mark Arnold promised me that I would receive roughly $100 million in cash at the IPO of the company, in exchange for between 12% and 15% of my shares.
I personally lost even more: I gave up my chairmanship of the board and effective control of the business; I gave up my board seat; I gave up my employment – a job that paid me $500k a year: And I gave up my dividends, which were typically between $10 million and $20 million a year. No one would have given up these things without compensation. All of these things were stolen from me, with zero compensation given, by members of this board of directors.
There was a $3 billion IPO. And what did I get out of the deal? Bupkis.
BUPKIS!
Now I do not know why those original partners of the predecessor LLC were stiffed out of their right to receive a dividend or liquidity claim to the company’s resources. But delving further into the history of the SPAC merger to IPO the predecessor company is an interesting read between the lines. As part of the deal Mr. Stansberry received class B shares of Marketwise.
There was a need for the class B shares because prior to the SPAC merger the predecessor company offered incentive compensation class B units / “profit interests” as part of compensation and retention strategies for certain employees.
Class B Units further explained from MKTW earlier SPAC merger docs March 2022:
These class B Units contained service-based vesting conditions and had different vesting terms depending upon the employee which ranged from vesting immediately to eight years; vesting was accelerated upon the completion of the Transactions. Compensation cost was recognized on a straight-line basis over the requisite service period until vesting for the entire award, but at least equaled the number of vested units determined by the underlying vesting schedule. Forfeitures were accounted for in the period in which they occur.
The Class B Units were subject to a put and call option whereby we could elect to redeem or be required to redeem these units at a value determined by a predefined formula based on a multiplier of our net income as defined by management. Employees may not exercise the put option until 25 months have elapsed from the issuance date. Since the redemption price is not representative of fair value, the employees are not considered to be subject to the risks and rewards of share ownership, and the Class B Units were classified as liabilities in the accompanying consolidated balance sheet. Prior to the completion of the Transactions, the liability for Class B units was remeasured to fair value at the end of each reporting period.
Since Class B Units were classified as liabilities, all cash distributions made to the unitholders of the Class B Units pursuant to our operating agreement were considered to be stock-based compensation expenses. Upon consummation of the Transactions, the old operating agreement was terminated and a new operating agreement was adopted. This new operating agreement does not contain the put and call options that existed under the previous operating agreement, and the common units are treated as common equity under the new operating agreement and do not generate stock-based compensation expense. See also Note 11, Stock-Based Compensation.
More to understand this can be found: The Up-C Structure in IPOs
For valuation, a back of the envelope calculation shows the 52 week low price of $1.45 stock price was at 11x normalized P/E, assuming $0.12 EPS with all class B shares converted to A shares.
The cash profile of MKTW makes the stock particularly enticing and worth watching closely which is providing new management a margin of safety as they work through the pain points. Adjusted cash flow margin generally yields mid-20% with strong conversion cycles. At current $2.43 stock price, MKTW trades a bit above fair value.
The company appears to have caught the eye of investor sentiment over the past few weeks as MKTW reported a settlement has been reached and instituted a divided(I do call bullshit on management’s 4 cent dividend.) Exciting?!
What is concerning is not the losing subscriber base as this seems to be cyclical that ebbs and flows with the average retail investor’s trading experiences in the stock market(This cohort tends to buy high and sell low.) The concern simply is that there are no more catalysts to be played, a pile of cash that gives management to much comfort to squander on acquisitions and useless stock buybacks (management has projected how they feel about dividends and given the company’s business model there is very little tangible assets to hold claim should management really mess up the next few years.) Dividends give back real returns versus share buybacks on a company supported by intangible assets.
Plainly, there could be more pain ahead.
These are simply my notes and thoughts about the company.