FSNN Going to $4 or More…After Unterberg Completes Sale

Fusion’s recent merger announcement has sparked the shares to trading levels not seen in years and trading volumes never seen before. The deal is transformational to the Company as it creates an entity with a broad offering of higher margin cloud services business, meanwhile the combined companies have the heft and scale to be real players in the space. This makes the stock incredibly attractive to institutional investors for the first time ever.

The shares rallied sharply from $1.20ish up to a high around $3.50 in three days. Since then, they have retreated down to $2.89. How should investors value shares in FSNN? And, what will the trading activity look like going forward? I’ll attempt to answer that here.

Valuation…

Is it truly possible that this company is worth 2x more today than last week? Simple answer: Yes! Here’s why. Fusion should never have been trading at $1.20 to begin with. On a price to EBITDA ratio, it was the cheapest stock we cover. It had grown nicely through acquisition, broadening the customer base and the product offering, while boosting revenue and potential EBITDA.

However, years of underperforming expectations had led the shares to languish. Unterberg had been the primary outside investor the last few years and they were frustrated, culminating in a letter to the board demanding change.

In the Birch Communications merger, they got their change. Suddenly, Fusion is a Company with guidance for $150M in EBITDA in 2018. Putting a decent (7X?) multiple on this puts the shares at $4.85 next year. Which would be a return of 67%. I think this is very achievable.

Trading…

This is where Fusion gets interesting. In the past, there’s been no real, consistent demand for shares, nor any valuation support. The stock traded based on the frustrations of investors, waiting for Godot, and generally speaking had random rallies but was for sale consistently.

This is no longer the case. Fusion will now have small cap funds looking at this from a cash flow or EBITDA perspective and adding to positions on weakness. There will be an underlying bid for FSNN shares and the days of the stock having no floor are over.

Thus, I believe Fusion stock will trade higher over the next year, approaching the 7X multiple at some point. But, not right away.

For now, I expect to see Fusion trade here or slightly lower. This is because their largest outside shareholder, Unterberg, is selling their stock. Quite rapidly, actually, as these filings show.

This creates a great buying opportunity for investors. Watch the volume and the filings from Unterberg. Expect the stock to stay here or lower for a while and, if the selling nears completion, you can pick up shares for the next move up. And, once Unterberg is done, and new investors have the chance to evaluate the new Fusion, the stock should move up.

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