Back a few years ago, Fabrice Taylor, he of The President’s Club newsletter, was casting all sorts of magic on smallcap and mediumcap companies, which would cause investors to flock to them and ride ensuing rises. At times, it didn’t even really matter what the company did. If Fabrice said “I like this thing,” the thing was going up.

One of those things was theScore, a cable sports channel that decided life would be better as a mobile app. No, really, this was a thing someone thought.

App developers aren’t necessarily my favorite place to put money, for several reasons. Often they’re one-trick ponies crying for attention in a sea of me-too’s. Every once and a while something hits, like Angry Birds or Farmville, but since the saturation of the mobile app space is a real thing, that dog-eat-dog world with little to no margins ends up swamped with companies ripping off other companies, and whoever ends up with the random best spot on the iTunes store is suddenly huge while the originators die in the bleacher seats.

But investors don’t go checking iTunes rankings or see how something sits on Google Play, because people don’t typically use or research the things they invest in.

How many gold bars have you bought lately? How many Teslas are in your driveway? How much weed have you never mind, that was a bad example..

The mobile app space is yet another modern slice of our tech-driven economy that for some reason allows companies to operate, sans revenue and profits, for an extended period, and yet retain their market value like a company making actual sales might.

This was understandable when the mobile app space was new; you had to be somewhat forgiving as the sector itself was still forming and companies were really finding their way in unknown territory. However, that is no longer the case. This is especially true for mobile sports apps – hello, theScore.

Company Chairman and CEO, John Levy, sold theScore Television Network to Roger’s Cable back in October 2012, so he could jump on the online wagon by creating a mobile theScore spin-off. The app was to be a jumping on point for mobile sports fans where they could get up-to-the-minute stats, gameplay, analysis, and social media content. You know, the stuff they can’t get at every single other sports app oh wait they can it’s all there dear god.

The company spent some money promoting and managed to gain a wack of users, which is easy to do. Holding those users, once your app falls off the front page of iTunes, is a lot harder.

theScore has done well building a userbase (for a small company), but has by no means been moving up the ladder to overtake the CBS’ and ESPN’s and NHL’s and Sportsnet’s of the world.

And, more importantly, serving news, data and analysis to those people costs money.. more money than theScore has seen back in advertising. Profits have not been seen.

In fact, in the most recent financials for theScore, the company brought in $23m in revenue for the year 2016, which is great! That was up over 100% from the year previous! You know what else was up from the year previous? The net loss, of over $16 million.

The company says it has over 4 million monthly active users and 17 million registered users. The app has been downloaded between 10m and 50m times according to Google Play, so expect the same on the Apple side, and it’s still not profitable? That’s a lot of people having the app, even registering the app – but not actually using the app.

And when your business model is ad-based, it really doesn’t matter how many millions of people have downloaded the app, it matters how many are using it, and seeing the ads. The ads which, btw, come in video format, something mobile users HATE because it eats their bandwidth.

How many more MAUs would theScore need to acquire to get profitable? And are there enough users in the Apple and Google universes to make that number possible? Assuming it found those users, could it even sell enough ads to serve them?

When your revs are $23m and your costs are around $40m, you’d want to at least double those MAUs (assuming there’s no cost elevation in serving twice as much traffic, or increased ad sales staff, but let’s be generous here and assume that’s the case) to get profitable so, as things stand, theScore probably shouldn’t be worth the $80m valuation it’s currently sitting on, based on share price.

Credit where it’s due, theScore’s exec team aren’t oblivious to this, and decided to add some value in the last year by expanding their offerings – and that userbase is a prime target to send in-house ads to if you’re looking to jack those new offerings quickly.

Levy thought in-depth eSports (read: pro video game news) coverage was the key and, in 2015, put together a team to create a focused eSports app.

Now, we like eSports as a nascent space here at Equity.Guru. Gamers, professional or otherwise, are beginning to experience the same star phenomenon once reserved for quarterbacks in the NFL and Hollywood starlets. Millions are tuning in everyday to watch the experts play their favorite games such as Call of Duty, World of Warcraft, and Minecraft, on YouTube, Twitch and a variety of other streaming sites. Not only are millions watching (hundreds of millions, if you’re talking the annual League of Legends world finals), but there are a select group of players who are also making millions in sponsorship dollars as a result.

So theScore is giving that world a run, which probably isn’t the worst idea, but will take some serious promo coin to get up and running. The pro gaming world is split right now, with no one company or promoter having brought the whole shebang together. Call of Duty plays out on one platform, Legends on another… So where does theScore fit in?

Yes, I should be patient, this is the development phase of the business. theScore is building its base and as I said before, had over 4.0 million active users out of a roster of approximately 17 million registered users. On the other hand, the Fox Sports website had about 17.4 million active users per month in the spring of 2016. Maybe the company should differentiate again, because it would be a sore loser if it went all in at this table.

Well, that’s just what Levy did when he announced theScore would not only become the defacto source of eSports stats and feeds, but he was going to also steer the app developer into the explosive space of online fantasy sports with theScore ‘Squad Up’ app.

Squad Up was designed to kick a hole in the rapidly growing Daily Fantasy Sports (DFS) segment. DFS differs from regular fantasy leagues in that the players don’t have to stick it out for a season. They can suit up a different team each day to accomplish a stated task like winning, hitting a spread and/or scoring at a particular time. The tasks are many and varied, and only limited by imagination – and the buy-in fee. Which is why regulators have been booting it about for the last year, calling it gambling and figuring out whether A) it should be legal in each state and B) if it should, how competitors in the space should be regulated properly.

DFS is so new that analysts are having trouble putting a value and a potential to it for several reasons. A year ago, market pundits were calling for $18 billion in entry fees by 2020. Just 12 months later, that tune has changed drastically. The most optimistic forecast for the space expects entry fees to total almost $14 billion by 2020 with the worst-case scenario peaking at about $3.0 billion.

Why the discrepancies and “scenarios”? Well, its gambling, despite what they tell you, and each state has their own rules with many considering the practice illegal. This is changing both perceptually and legally, but the process is slow. As of August 24, 2016, there are 12 states allowing DFS with 10 recently contested states, five historically banned states, 13 states that have introduced legislation, and another 10 with no legislation at all. New York’s governor, Andrew Cuomo signed a DFS bill into law this last August, but until other big states like Texas and Illinois get off the fence, many other states may remain in limbo.

Quite simply, nobody knows what it will look like six months from now, never mind five years.

Now for a little more bummer time. Even though DFS is likely, eventually, somehow, going to be on the rise, it doesn’t mean this niche is wide open to anyone. It’s a tight market with two major players: FanDuel and Draft Kings, which are in the midst of a merger. If they get regulatory approval, it will create a towering giant shadow cast over a distant second place. All of these companies are giving away millions of dollars in prizes to keep users coming back. Millions of dollars that theScore does NOT have and most likely will NOT have without further financing and big gambles of their own.

For the sake of argument, let’s say theScore’s Squad Up succeeds and builds a niche. What’s that going to look like for the company and its investors?

Well, here are some numbers regarding other successes in DFS. Top-three contender, Fantasy Aces (FAS.V), reported pulling in gross revenues of $1.33 million for the nine months ending September 30, 2016. However, when the dust finally settled, the company claimed a net comprehensive loss of $1.9 million for the same period.

This was partially due to Fantasy Aces dropping over $1.0 million on ads and promotion – about half a million less than they filed the year previously. In short, it takes money to make money and in this business, it takes a boat load. So where does theScore intend to become a billion-dollar deal when the company has three prongs, all of which face large-scale, well-financed competition in markets they’re not first into? Even the big two are making peanuts in DFS, giving away almost everything they earn, and only surviving on volume. That’s the reason they want to merge – because then they could quit the Coke vs Pepsi ad spend and focus on just kicking about the little guys.

theScore has achieved when it comes to building a userbase, and that’s no small thing. But they started with a userbase of TV watchers, and advertisers interested in that space. How many of those are as interested in serving an unwanted video ad on a mobile phone?

The positivity toward theScore in the markets, presented by analysts such as James Hodgins, frankly puzzles me. He puts a $0.55 target on theScore and thinks the company has what it takes to go the distance. What I see is a television broadcast company which grew long in the tooth, diversified out of desperation and got mired in a money-pit-mandate involving a nascent sector that it is going to have to spend hard to be noticed in.

I could be wrong, but I just don’t see where this ends happily.Especially with the market cap already WAY over what makes sense.

As always, do your due diligence before making any investments decision. No,. really, please do some. Especially before buying into theScore.

–Gaalen Engen

FULL DISCLOSURE: The author has NO connection to theScore and the company is NOT a EQUITY.GURU client.

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Gaalen Engen

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