Rimini Street Inc (RMNI): Microcap with Massive Potential
First of all, the Rim Rimini Rim Rimini title is simply to mimic Bert from Mary Poppins. The name of this company always reminds me of that chimney song. Think the company should probably lean into that.
Taking On an Oracle
Oracle Corp. and SAP are two of the largest software companies in the world. SAP is the largest software company, by revenue, outside of the United States. However, both are losing significant business to a nobody named Rimini Street Inc (RMNI).
Oracle and SAP both have made legacy software products for businesses and governments. They were innovative, and their customers readily updated to the next version of the software for years. Then, the iPhone effect occurred. The new software updates tended to looked very similar to previous editions, until they were basically the same. Customers started to get disgruntled by that fact, and that they were paying to upgrade, without any real reason.
Well, there is a reason… Oracle and SAP told these companies that if they don’t upgrade, they will eventually quit offering software and IT support and minor bug fixes for these older software versions, forcing them to upgrade and spend mountains for “new” software. Enter the protagonist of our story:
Rimini Street, just like John McClane or the Kool-Aid Man, kicked down the door and offered to provide the IT support and minor custom bug fixes that these companies needed. They don’t make the software, but they can service the older models that are already good enough for the customers.
It’s like if after you bought your iPhone, and you love the current iOS. You think it’s the best one for you, so you pay someone else to fix some minor bugs. Now Apple can’t force you to upgrade iOS’s and slow your phone down without your consent (not a perfect analogy but you get it).
Rimini also receives about 4.8/5 stars on all of the service that they do. The customers love the support that they are offering. In addition, Rimini Street is offering their services at half of the price that Oracle charges for their support. Not only is this company offering better services than Oracle and SAP, they’re doing it at a massive discount as well. This gives the businesses in these unprecedented times a bit more flexibility with their capital spending. Just the other day, Rimini Street signed the Brazilian freaking government to a long term contract! It’s legitimate.
The Stock versus Fundamentals
The stock performance in the past 5 years has been a terrible sight. Imagine 2020 as a stock performance and that’s what you’ve got. Just…keeps getting worse.
The stock price has been cut in half. This is due to two things: how the company went public and lawsuits with Oracle. Rimini Street was acquired by a Special Acquisition Company (SPAC), and those shareholders did not like the acquisition and the nature of how they went public. It does add the potential for dilution in the future, but that should not scare investors off at these prices. Secondly, Oracle didn’t like that Rimini was stealing their business. They’ve sued them (a lot!), and for a small company this is no small matter. Rimini has won every case, except two, but those were individual cases where it was a special request from the customer that was the issue. So, those two issues were rectified. Now, Rimini is actually countersuing Oracle for non-competitive business practices.
I love it. Better drama than the Bachelor could ever give you. That explains why the stock has been doing poorly, but how has the company been doing?
The Fundamentals and Balance Sheet
The company’s revenue and cash flow growth has been actually really good. Check it out.
The balance sheet is also impeccable.
To summarize these two figures, the company has been increasing revenue year over year for every year of its existence. The company currently has about $315 million in reoccurring revenue. The company for the past two quarters has been GAAP profitable, even though the graph doesn’t show that. In addition, the company now has $82 million on its balance sheet with no debt. This is extremely good for a company that is taking on two Goliaths at once and is valued at around $375 million.
The company has been bolstering its sales team over the last year, even with Covid, and is looking to continue growing that team to really boost future revenue growth. The company has a great track record and sales pitch. They’ve signed some big time clients that make excellent case studies, and I think adding more feet on the ground will cause the revenue to start to take off. Now, what would that mean for the stock price??
The company is currently valued at $375 million.
- Price to Sales ~ 1.2: revenue growth in the mid-teens with 60% gross margins
- Price to Free Cash Flow ~ 12, with massive potential growth with new contracts
Neither of these metrics account for the fact that the company currently holds over 20% of the value of the company in cash either. Valuation is criminally low. With its current sales and growth, it’s at minimum 60% undervalued. If revenue continues to grow, that discount may increase. At a 2x price to sales, with mid-teens revenue growth, in one year that puts a realistic valuation at $725 million. That’s nearly 100% upside from the current price, and that’s definitely on the very low side of what the valuation should be.
The problem with this company is the stock hasn’t gone anywhere for the past year.
However, do you see where I marked with my cursor? The massive drop after was because the company issued a lot of stock and diluted the shares. If you don’t know what this means, don’t worry too much about it. This stock offering was sold to large number of institutional investors. The stock dropped because people weren’t happy that they were unnecessarily raising capital and diluting the stock.
Then, the stock started rising… this was because the company had a knockout earnings report. All of those institutions that bought the shares in that offering noticed, because they were already share holders! Brilliant move by management to build a group of investors with deep pockets who would notice if they did well. This has in turn propelled more recent stock price growth and continue to propel the stock in the future.
I think with another knockout earnings or two, this stock can start to go on the road to being valued correctly. With a 50% discount, this means the company will go up about 100% in one year, if all goes right. Hope you all enjoy!! I don’t post often. If you liked this post, consider subscribing for my hyper-rare stock recommendations.