If you like GameStop (NYSE:GME) stock, you’re not alone. Ever since its 2021 surge, shares of the video-game retailer have occupied a special place in the hearts and wallets of Redditors. Around 30% of the company’s free float is now locked away in transfer agents, a move to keep shortable shares off the market. And GME prices remain around 400% higher than their pre-spike values. For early movers, GameStop has been a massive financial windfall.
The same is quickly becoming true for Troika Media (NASDAQ:TRKA), a New York-based ad tech company. Since March, the TRKA ticker has dominated online forums, routinely becoming the top-mentioned stock for days on end. Shares of Troika have already risen more than 125% this year. Fans are calling for prices of $1 or more. According to the firm’s lone I/B/E/S analyst, shares could have another 4X upside.
To their credit, social media investors have identified striking parallels between Troika Media and GameStop. Both firms have started with rock-bottom share prices. And management at the two companies have engaged in startlingly similar financial restructuring plans. These are often catalysts for super-normal returns.
But as investors become increasingly excited about Troika Media, some might ask:
Is Troika Media really the next GameStop?
TRKA Stock: The Background
For investors unfamiliar with Troika and TRKA stock, here’s a quick summary.
Troika Media Group is an acquisitions company that can trace its roots back to Roomlinx, a Nevada-based firm founded in 1998. Over the years, the entity would purchase everything from broadband companies to brand consultancies. It wasn’t particularly successful; the firm averaged a $9.4 million loss per year and required a steady stream of stock and debt issuances to fill the gap.
In 2022, all that changed when Troika bought out Converge, LLC, an ad tech firm generating around $21 million in profits annually. Suddenly, Troika’s history of losses became immaterial. “Troika 2.0” would become a cash cow… at least in theory.
The deal, however, didn’t come for free. To fund the $125 million acquisition, Troika turned to Blue Torch Capital, a direct lender specializing in micro-cap companies.
Here’s my summary from March 7, 2023:
“To raise its final $50 million of required capital, Troika Media issued $50 million worth of Series E convertible preferred stock. That’s around 33.33 million new shares, assuming a $1.50 conversion price. And if TRKA’s stock fell below $1.50, preferred shareholders could convert at 80% of the current market price, subject to a 25-cent floor. In the worst-case scenario, the agreement forces Troika to issue 200 million new shares — a fact that’s not lost on Troika’s accountants. In April 2022, the firm filed an S-1 statement that allows the additional 200 million in stock.”
That turned Troika Media into a potentially volatile play. In the best-case scenario, preferred shareholders would hold onto their Series E convertible for the long run, knowing that exercising the convertible stock would drive prices into the ground. But in a bearish case, preferred shareholders could convert anyway and hope shares eventually recover.
Troika Media: Reddit’s Next GameStop?
First, the good news:
On paper, Troika Media resembles GameStop on several key points.
From a trading perspective, Troika Media had around 21 million shares sold short at the end of February, a 72% short interest ratio. That’s roughly the same as GameStop’s elevated 88% figure in January 2021. Both firms would go on to experience short squeezes in their stock, an essential ingredient to getting retail investors excited.
Next, there’s the financing. In late February, Troika Media announced it was retaining banking firm Jefferies LLC to “optimize its capital structure and explore strategic alternatives.” GameStop used the same firm in December 2020 to help raise capital and both would go onto file S-3 forms. Traders tend to look for patterns and these financing deals look almost identical from a U.S. Securities and Exchange Commission (SEC) filing standpoint.
Then we have Troika’s low share price. The ad tech firm currently trades for a roughly $100 million market capitalization, valuing its shares at about 0.3X price-to-sales (P/S). That’s the same as GameStop’s valuation immediately before its short squeeze and about eight times lower than the average U.S. firm. In other words, it’s a siren’s call for deep-value investors looking for enormous returns.
Other metrics come to the same conclusion. Troika’s forward EV/EBITDA ratio sits at 3.1X, a figure usually only seen in private-market transactions. (Most ad tech firms trade for 12X multiples or more). Even I once put a $4.70 pre-dilution value on the company. (To be fair, I also gave a 40% chance that Troika “runs off with all our money” and would be worth zero).
Finally, there’s a turnaround catalyst. In GameStop’s case, activist investor Ryan Cohen promised a corporate overhaul to refocus the retailer on e-commerce and other non-mall-based activities. For a brief moment, it seemed as if GameStop could relive its glory days of growth… whether in Web3 gaming or non-fungible tokens (NFTs). And as for Troika, the Converge merger would turn negative profits into positive ones as soon as merger costs flowed through.
…Or the Next Vinco Ventures?
Several differences, however, separate Troika from GameStop. And not in a flattering way.
First, there’s the opacity of Converge’s business. The acquired ad tech firm claims it can earn around $27 million in adjusted EBITDA per year, even though Troika reported a net gain of only 112 employees during the merger period. Massachusetts-based ad firm Harte Hanks (NASDAQ:HHS) requires around 2,500 employees to generate that level of profits. That raises the question of how so few Converge employees can generate such massive profits.
Then there’s an issue of corporate governance. My initial assessment of Troika assumed that the firm would act in good faith to keep investors updated about its outsized Series E deal. A Schedule 13D or 8-K filing should have notified shareholders of any significant exercise, since the dilutive effect would be 1) a material event, 2) a 5% or more change in ownership, or 3) both. But Troika Media failed to report any exercise. Instead, it took until March 7 for the firm to retroactively announce in its annual report that its share count had risen over five-fold.
On the other hand, GameStop has been relatively clear about its finances and business outlook. The company has kept top-tier auditor Deloitte & Touche since 2013 and frequently updates shareholders in its detailed earnings calls. CEO Matt Furlong is refreshingly straightforward about GameStop’s prospects.
From this perspective, Troika looks more like Vinco Ventures (NASDAQ:BBIG), a different Reddit stock marked by poor corporate governance. Last week, Troika’s management announced that it had agreed to settle an ongoing issue with Blue Torch Capital over its failure to file its initial S-1 agreements properly. However, the 4X penalty paid in new shares seems so excessive that it borders on self-dealing. Management has been similarly vague about its financing deals and the reasons for hiring Jeffries in the first place.
Of course, these issues still seem tame compared to Vinco. Troika has yet to see a boardroom fight end in a hostile takeover. Or have its CEO replaced after a lengthy legal battle. And TRKA stock shares have been non-compliant with Nasdaq listing requirements for far less time than beaten-down BBIG stock.
But the longer Troika keeps investors in the dark, the more it will eventually resemble its controversial counterpart.
Is TRKA a Good Stock to Buy?
In March 2022, Troika Media’s exclusive placement agent, E.F. Hutton, published a bullish report on the microcap stock. Analyst Ben Piggott wrote:
“We are initiating coverage of Troika Media Group (TRKA) with a Buy rating and $4.50 price target. We view the recently closed $125M acquisition of Converge Direct to be transformational, as it is highly complementary to the existing business and provides a level of scale and meaningfully positive cash flow.”
Fast forward a year and the conclusion has only proved partially true. The Converge acquisition was transformational, just not in the way most might have expected.
Many Redditors have taken these signs that TRKA stock could become the next GameStop. A cheap share price, the retention of Jeffries and the recent short squeeze all seem like a repeat of GME in 2021. There are plenty of historic rhymes to go around.
But whether TRKA is a good stock to buy remains unclear. And until the firm can clarify its financial standing, investors should treat Troika Media with the skepticism that other relatively opaque firms tend to deserve.
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On the date of publication, Tom Yeung did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.