Franklin Wireless (FKWL) develops and fabricates routers, mobile hotspot and related IoT devices (like pet and car trackers).
The company’s stock price rose 7-fold after the COVID-19 pandemic started. After sales growth proved temporal the stock started to decline. In April of 2021, Verizon, buyer of as much as 64% of COVID induced sales, announced that it would voluntarily recall FKWL’s best-selling product (a mobile hotspot router) because of battery failures in some devices.
Additionally, some of FKWL shareholders have initiated a class action against the company and its management alleging that the company did not disclose the possibility of the recall of products.
Some analysts see the company trading at a discount because of fears of litigation from Verizon and shareholders. These analysts consider that there is a serious chance that FWKL can return to the same degree of profitability that it enjoyed while the pandemic was in full display.
This analyst believes that the company cannot return to those profitability levels, even if litigations against it prove unsuccessful. The reasons are that FKWL’s products are difficult to differentiate from those of its competitors, the company has clients with heavy pricing power and the fact it had not produced real profits before the pandemic started.
Note: Unless otherwise stated, all information has been obtained from FKWL’s filings with the SEC.
The business model
FKWL’s star product is a mobile hotspot router that allows the user to provide internet to several devices from a 4G or 5G connection. Most of these products are bought by telecom carriers like Verizon and later resold to end-users along with a network plan.
FKWL develops its products in South Korea and fabricates with two independent factories in Asia (presumably in China).
A simple scan through Amazon proves that FKWL’s products have no difference in quality, look or price with the products of its competitors. If that is true from a consumer’s perspective, even more from a provider’s perspective.
Carriers choose these devices based on price and reliability. Its purpose is to provide a good enough experience to the user so that the user can keep paying for the network services. To the carrier, therefore, a reliable product, in terms of quality, supply and functioning, is paramount.
The pandemic’s lost opportunity
In this respect, Franklin Wireless had a great chance during 2020, because supply shortages and increased demand pushed carriers to try new options. In this context, Franklin was able to multiply its sales by landing contracts with at least two carriers. One of these carriers, Verizon, accounted for 65% of total demand during the pandemic.
Although sales peaked after the pandemic receded, the chance for Franklin Wireless was still there because Verizon had worked with them and may have decided to grant them more contracts.
However, problems with a few hotspot devices’ batteries that represented a fire hazard made Verizon issue a voluntary recall announcement for an estimated 2.5 million devices.
Can it come back?
The investment question now revolves around whether the company will be able to increase its profitability, in contrast to the mediocrity during the decade that preceded the pandemic.
To some analysts, if FKWL returns to $75 million in revenues and $6 million in net income then it is still a buy at a market cap of $50 million, especially considering that according to its latest 10-Q filed with the SEC, the company holds $50 million in cash against no important liability.
While it is true that the pandemic may have accelerated adoption in the segments where FKWL operates, that does not necessarily imply that FKWL will supply that demand. This is particularly true considering that the decision-makers are the carriers and that they choose based on reliability, a field where FKWL has lost some credibility.
According to one FKWL investor relations website press release, from December 2021, the company is already selling its latest 5G hotspot router through the carrier C Spire. This may prove a road for some increase in sales. In fact, C Spire is already selling two other devices from FKWL.
It is still too early to see the effect of this new channel in the financial statements. Investors should wait at least until May, to see the interim statements corresponding to June 2021 towards March 2022 to see if there is any improvement.
Numbers up to this point are not good. Revenue for the first quarter (June 2021 to September 2021) has been disappointing. According to the interim statement, revenue is lower than that of the same period in 2019 and 2018, two years in which FKWL sold so little that it had operative losses. FKWL sold only $3 million in 1Q21, against $9 million in 2019 and $13 million in 2018, not to mention $62 million in 2020.
The stock is truly trading at much lower prices with respect to the price it reached during the pandemic, and indeed conditions have changed for the better in comparison with the situation prior to the pandemic.
Particularly, the use of mobile hotspot devices has increased considerably. However, it is not clear whether or not Franklin Wireless will be able to benefit and profit from those changes in demand.
If Franklin cannot increase revenues above the levels of 2019, then its stock is currently very expensive, because before the pandemic the company barely managed to make $1 million in net profits, against a current market cap in excess of $50 million.
Our thesis is that there are significant difficulties for Franklin to increase revenues above previously seen levels. The damage to its reputation after the Verizon incident may seriously affect the company when trying to land contracts with other carriers.
Therefore, we believe conservative investors would prefer to wait and see. Of course, it’s possible that Franklin can actually increase sales and profitability. In this respect, the effect of the new contracts with C Spire will be the most important factor. Information regarding C Spire induced sales will only be available with the financial statements from 3Q21, to be published in May 2022 at least.
In our understanding, the current situation and developments do not grant a sufficient margin of safety to invest given that many questions remain unanswered.