Two Very Good Reasons Why Blue Calypso Stock Looks Undervalued.

One of the primary factors acting to limit the growth of the social media marketing industry is the difficulty that advertisers face in quantifying the effectiveness of a promotional campaign. A company attempting to overcome this problem is Blue Calypso, Inc. (OTCBB:BCYP).

Blue Calypso, Inc. is a digital marketing company. Its platform connects advertisers to users of social media, and encourages those users to promote products and services on a peer-to-peer basis. The technology involved allows Blue Calypso to track the promotion as it spreads, and in turn,  offer insight and analysis to the advertiser as to the effectiveness of the campaign.

The company offers two main products; EMGAGE™ and SocialEcho™. EMGAGE™ is a platform that allows a company to promote its brand, goods, or services through its employees’ social media channels. SocialEcho™ is similar, but designed to encourage promotion through the social media channels of a company’s customers, rather than its employees. Advertisers can use both platforms to track the reach of a promotion, and quantify its results.

By offering this facility to advertisers, Blue Calypso could be in a position to take advantage of the expected growth of the social media marketing industry. Forecast to be worth $11 billion by 2017, the social media advertising industry is growing at a rate of 22%. It is the fastest growing method of online advertising, which is in turn the fastest growing form of advertising in the whole industry.

However, the company’s potential to benefit from rapid industry expansion is not all that investors stand to gain from holding its stock.

Blue Calypso has patented the technology it uses in its platforms. The patents it holds prohibit others from using computer and mobile based technology to target promotion based on personalized criteria. As an example, it protects Blue Calypso’s right to send promotional material to an individual via their mobile phone, or tablet, based on geographical location.

Many companies that undertake or facilitate social media advertising use this method of promotion and as a result, Blue Calypso claims, are infringing upon the patents. Last year it filed suits against Yelp, Inc. (NASDAQ:YELP), Groupon, Inc. (NASDAQ:GRPN), LivingSocial, and MyLikes.

Last week the company reported a conclusion to one of these suits. The outcome requires MyLikes to pay Blue Calypso the equivalent of a 3.5% royalty for the use of its patents. Mylikes uses the technology it now licenses from Blue Calypso to monetize a network of around 500,00 publishers.

The hearings for the remaining suits will take place later this year and during early 2014.  A similar outcome in each and Blue Calypso could stand to derive substantial benefit from the monetization of its patent portfolio. 

To get an idea how much benefit, consider the company’s financials.

At the time of writing Blue Calypso’s market capitalization is approximately $16.5 million based on just over 125 million shares outstanding. It generated $75k revenue in 2012, up from $51.5k in 2011. According to its most recent 10-Q filing the company generated $10k revenue for the three months ended March 31st this year. The same filing reported a net loss for the period of $970k.

By comparison, Groupon’s market capitalization is approximately $5.8 billion, and it generated $601 million in revenue for the three months ended March 31^st this year. The company’s is basing its recent growth estimates on an increased focus on its mobile advertising operations, and a revamped search system that offers advertisers the facility to target consumers based on location. Both of these things, Blue Calypso will argue, infringe upon the patents in question.

The Groupon hearing is in November, and is to be held in East Texas; a district known for its judges’ reluctance to make summary judgment in cases such as this. Instead, most recommend patent dispute cases  for jury trial. Very few end up in trial, based on the cost and risk to the defendant, and are more often than not settled out of court.

An out of court settlement that mirrors the one just agreed with MyLikes, but with a company that operates at the scale of Groupon or Yelp, could result in Blue Calypso generating licensing revenue that far exceeds its current market capitalization.

What are the risks?

By virtue of Blue Calypso’s emerging tech status, risk lies  in the company’s ability to finance its operations. The company will rely on short term financing until it can generate revenue to a level that covers its operational expense, reported at just short of $1 million for the first three months of this year. This risk is somewhat mitigated, however, by the prospect of licensing revenue in the near future. While many emerging tech companies run at a loss while they develop technology and carve out market share, Blue Calypso might be able to fund some of this expense through the revenue it stands to generate if successful in the dispute hearings.

There is also the possibility that the company may lose its patent disputes. While the recent settlement with MyLike suggests that the patents in question are strong enough to hold up to legal scrutiny, it by no means guarantees reflective success against Groupon, Yelp and LivingSocial. If Blue Calypso loses these cases, its continued expansion will require other forms of financing. Further issuance of shares to meet its financial requirements could dilute current share value, as might the 14 million outstanding options that could become dilutive if its share price rises.

In terms of competitor risk, the companies Blue Calypso stands to benefit from if the hearings are successful are also the companies it stands to compete with for revenue in the social media advertising industry. Many of these are financially superior, which will make gaining an extensive market share difficult. However, acting to reduce  this risk is the intellectual property the company owns. The patents that cover the peer-to-peer distribution of promotional material will afford Blue Calypso a certain level of exclusivity in developing new technology within the sector. This gives the company a competitive advantage over others, regardless of financial standing.

Finally, there exists a certain level of risk in the concept itself. Social media advertising is a young, and as of yet relatively unproven, industry. Its own growth is reliant upon the continued growth, or at least stabilization, of the user base of social media platforms. If the popularity of the media declines this would have a diminishing effect on the potential market for advertising across it.

To conclude, Blue Calypso is a development stage company with the potential of a two-fold benefit to investors. The first of these benefits is that its current products are generating revenue, and the intellectual property that protects them will enable the company to grow and develop the technology that, at present, drives the peer-to-peer social media advertising industry. The second, if Blue Calypso is successful in its upcoming patent disputes, then the licensing revenue it stands to receive could outweigh its current market capitalization. Both of these things suggest its stock might be undervalued at its current price.