The TSX Venture Tech Sector is Heating Up Again

Read onwards for a tech stock that:

Has an extremely low share float and has a history of a quickly appreciating share price.

Turned a profit in Q3 2011 for the first time and looks to do the same on a strong Q4.

Is less than $6M in market capitalization, which is less than its Q3 revenue.

Its Chinese subsidiary is one of China's fastest growing companies.

Recently signed a contract to run the online sales platform for the "Disney of China", furthering the possibility of exploding future revenue growth.

I'm back after a hiatus over the last few weeks. I'm very picky with my stock recommendations and won't push something unless it is the right time. It was the right time for TRE in June when I recommended the stock in the $2's and sold over $5. It was the right time for FXA when I spotted it as a buyout target in July and it has since been purchased. It was even the right time for CX in September as it was one of the few stocks that gained in price while the market crashed.

Now is the right time for Fireswirl Technologies (TSXV:FSW). The stock closed today at 11.5 cents after a massive sell of 500 shares at market close brought the stock down from 12.5 cents. Manipulation at its finest. The first time I mentioned Fireswirl was very casually in my post here. I mentioned it as a stock that has done well but didn't really recommend it as much of a buy at the time. Several things have changed since then to make me change my mind.


1) The Venture tech sector is heating up

The Venture tech sector is starting to pick up again. Intertainment Media (TSXV:INT), SelectCore (TSXV:SCG) and Poynt (TSXV:PYN) have all enjoyed a good run off of their lows over the last few weeks. During that time Fireswirl has remained rather quiet which shouldn't last very long based on the high correlation between the four stocks. Referring to the comparison chart between the four, FSW clearly shows a lag vs SCG and INT over the last few weeks, starting in early October. The last time such a lag took place was at the start of May. As seen on the chart, FSW's stock price quickly caught up then and it will likely do the same now. It suggests a move to 20-25 cents just to catch up to the recent activity of INT and SCG.


2) Fireswirl is a stock that can explode at any given moment because of its small float

FSW has much fewer shares outstanding compared to INT, SCG and PYN with just 44.6M. The small float has caused it to make huge moves in very short time spans as the company makes headlines. On February 7th of this year the stock opened at 5 cents. By the next day it had reached a high of 38 cents and closed at 23.5 cents.

The second huge run during May was a little more sustained. The run started on May 4th at 13 cents and peaked on May 30th at 54 cents as investors were clearly expecting big things from the company. But since then the stock price has come back down to the 11-15 cent range even with the new signed contracts and excellent Q3 results (discussed below). The company has delivered on the expectations that were set for them, except they've delivered them when no one was looking. Had their Q2 results been as good as their Q3 results, the stock could be trading at over $1 by now. But for now it's trading at just 11.5% of that price, making it excellent buy low opportunity for those investors who are paying attention.


3) The company made money in a quarter for the first time ever in Q3 2011

Fireswirl made $79K in net income in Q3 2011 according to their November 8th SEDAR documents, the first time they ever pulled a profit. Although it was aided by an FX win, the company has a very good chance of being operationally profitable in every quarter going forward based on their revenue growth trajectory and contracts signed.

Review their Q3 results here

"Total operating revenue increased to $5,957,481 and $15,136,428 for the three and nine months ended September 30, 2011 compared to $4,743,827 and $13,692,034 during the same period in 2010, representing an increase of 25.6% and 10.6%. The merchandise revenue has increased by 22.1% and 11.4% respectively while service revenue has increased by 201.3% and 19.7% respectively offset by no advertising revenue during the current period."

After an ordinary first half of 2011, the company has increased their revenue by over 25% in Q3 since signing an agreement with Logitech to operate their official online store in China. Revenue growth in Q4 should be much greater than 25% thanks to the huge contracts they signed after the close of Q3.


4) Q4 revenues will show record growth thanks to the agreements to operate the Chinese online stores of Casio and the "Disney of China"

Since the close of Q3, the company has signed two important contracts to open and operate online stores in China. The first one was a deal with Casio:

"Fireswirl Technologies Inc. (TSX VENTURE:FSW), "the Company", is pleased to announce that its subsidiary, Beijing Xingchang Xinda Technology Development Co., Ltd. ("XCXD"), has been appointed by Casio (Shanghai) Trading Co., Ltd. to exclusively build and operate its online flagship store in Taobao Mall, the largest online B2C shopping portals in China, and sell original Casio products." 

To understand the potential of this deal for Fireswirl, we need to understand how big Taobao Mall really is. Taobao.com ranks 15th in worldwide Alexa rankings and is third in China. Taobao is the Amazon or eBay of China and a significant player in electronics sales now has their store run by Fireswirl.

Fireswirl also teamed up with Sino Light Enterprise, the licensee of China's #1 animation brand, to run their online stores:

"SLE has engaged XCXD to set up, operate and maintain their official and flagship online stores, namely "XiYangYang Official Online Store" and "XiYangYang Taobao Flagship Store", respectively, to sell apparels with "Pleasant Goat and Big Big Wolf" branding for a term of two years. XCXD is one of China's leading e-commerce platform providers.

SLE has entered into a license agreement with an affiliate of Disney Enterprises, Inc., which in turn is the master licensee of "Pleasant Goat and Big Big Wolf", to manufacture and distribute, through the establishment of retail stores for children's wear for infant and children (from new-born to 14 years old) under the brand of "Pleasant Goat and Big Big Wolf" (the "Products") for three years with an option to renew for another three years in Mainland China."

Signing up SLE is particularly huge. It might be the biggest contract to date in terms of size and change of company philosophy to enhance future growth. While Fireswirl has traditionally signed up non-Chinese companies who wish to sell online within China, the SLE contract debuts the official online store as well as the one in the Taobao mall for a domestic company that has an extremely popular brand within China. From the NR:

"SLE plans to open over 1,100 retail outlets nationwide in the next three years and the first "Pleasant Goat and Big Big Wolf" retail store was opened on October 1, 2011.

"Pleasant Goat and Big Big Wolf", also known as "XiYangYang", is the No.1 cartoon series in China. In 2010, an animated movie derived from the series broke the domestic box office record for a Chinese produced animated movie."

Think of it from this perspective. Imagine that Disney and their popular characters like Mickey Mouse have existed for years but up until now there was no way to buy licenced apparel for your kids. Now all of a sudden they decide to open retail locations but at the same time they open an official online store as well as decide to sell on Amazon. What do you think will happen?

There will potentially be a huge backlog of orders for Pleasant Goat and Big, Big Wolf merchandise. The eventual goal is to have 1,100 locations open, but they won't all be open overnight. That means if people want to buy the merchandise chances are they will have to order online either through the official online store or the Taobao one as there likely won't be a store near them for several months or years.


5) Fireswirl is one of China's fastest growing companies

Fireswirl's subsidiary XCXD was named as one of China's top 21 emerging enterprises by the China Enterprise "Stars of the Future" Assembly 2011. As this honour took place during the summer, the distinction was awarded prior to the contracts with SLE or Casio. During a bullish market, it would be expected that a stock in Fireswirl's position would be trading at 10 times or more of their current sales. But that is far from reality, which leads to the most important point as to why FSW is significantly undervalued and a tremendous buy at these prices.


6) Despite all the exciting growth prospects, the stock can be obtained for pennies on the dollar

Refer here for FSW's key financial statistics

FSW's closing price for today of 11.5 cents puts the market cap at only $5.1M, which is less than their Q3 revenue of $6M. The last four quarters produced $21.7M in revenue, meaning their trailing 12-month price to sales figure is only 0.24. Compare that to similar Venture tech sector companies like INT or PYN which have market caps much greater than 10 times of Fireswirl's at just a fraction of the revenue.

PYN's trailing 12 month revenue figure is $2.2M but has a market cap of $69.5M for a Price to Sales ratio of 31.8, meaning FSW is over 130 times cheaper relative to PYN. Even mature industry players like Amazon.com Inc at 1.9 P/S or eBay Inc. at 3.55 P/S have P/S figures that would imply Fireswirl should be at a price that's well north of $1.

Fireswirl Technologies trades on the TSX Venture under the symbol FSW or in the US OTC under the symbol FRWRF.pk.

PYN on the TSX Venture currently trades at a P/S ratio of 31.8. If Fireswirl were to trade at a similar P/S ratio, its stock price would be $15.49.

AMZN on the NASDAQ trades at a P/S of 1.9. If Fireswirl were to trade at a P/S of 1.9, it would be trading at 93 cents.

FSW is about 10 times undervalued relative to large, slower growing online retail peers like Amazon and eBay and is over 100 times undervalued relative to its peers in the fast-growing TSX Venture tech stock sector.