WidePoint Corp (WYY)

[Methinks]

WidePoint: Unjustified Selloff, Our No. 1 Pick, Here's Why You Should Buy This Dip

https://seekingalpha.com/article/widepoint-unjustified-selloff-no-1-pick-why-you-should-buy-this-dip?

Shares of WidePoint were unfairly punished on the market selloff.
A look at recent company announcements and highlights.
FedRamp Certification - What it means for the company.
ISO Certification - The path towards international expansion and what it means for the company going forward.
We reiterate our BUY rating on the company: Bull Case: $30 (193% upside), Base Case: $20 (95% upside), Bear Case: $9 (11% downside).
We've covered WidePoint (WYY) - a leading provider of technology-based management solutions - in-depth over the past 10 months. We've outlined why the company was undervalued, why shares would triple - which they did - outlined why the company would re-win the $500 million contract from the U.S. government last November - which they did - and have been dead-on with our estimates and earnings previews.

We've been ahead of Wall Street analysts from the beginning and despite shares soaring nearly 150% in 2020, we believe WYY's best days are still ahead of itself. This article takes a look at several positive company announcements over the past month, a look at the market selloff and why investors should take advantage of the unwarranted selloff and buy this dip. As we've said before, the future has never been brighter for the company and recent announcements have only reinforced that belief for us.

The Unwarranted Selloff
Everything was in place for shares of WYY to not only test the 52-week high ($15.89), but to surpass it as well. Shares, like they usually do, were consolidating after a breakout and were setting up for another big run as you can see in the image below.

With a bullish ascending triangle and with the moving average convergence divergence ("MACD") looking to turn up as well, shares were primed for another run.

Unfortunately, the market had other plans and unfairly dragged WYY down with it over the past two weeks.

While a market pullback/correction was somewhat expected - and not really a surprise - the impact it had on WYY has been astonishing and doesn't make any sense as we've outlined in this article.

It all started on February 19, 2021 when a flash crash occurred right before the close of the markets. This spooked investors, which then continued a massive selloff the following week, hurting high-flying tech stocks and small cap stocks the most. Companies like Tesla (TSLA), Roku (ROKU), and many others saw their market caps drop considerably after another flash-crash type move happened on February 23. Most stocks, even a number of blue chips, dropped 10%+ at the open. This happened, despite the Dow Jones Industrial Average and NASDAQ, being down around 1%-2% at the time. It was truly a bizarre and unusual moment to see so many individual stocks plunge, when popular market indices like the NASDAQ, weren't telling the same story. With so many stocks plunging, you would have though the market indices would have been down 5%-6%, not 1%-2%.

While we expected a stock market correction to come after a monster run the past few months, we didn't expect WYY to drop as much as it has because of the way the company has positioned itself as well as positive fundamental and technical indicators. It was very disheartening and unfortunate to see shares of WYY get dragged down by the market in what we feel was a very unwarranted move.

As we've noted before, it's common for shares of WYY to not trade with the overall market. While bitcoin, meme stocks and the rest of the market were making new highs during the early part of February, WYY was consolidating, sitting on the sidelines and didn't react to the market's big moves. Again, this is not uncommon as it has happened numerous times over the past year.

So when the stock market started to cool off, we weren't worried about WYY since it tends to trade on its own and doesn't closely follow the market. However, unfortunately for investors, that wasn't the case as the company was unfairly dragged down in an unwarranted selloff.

Recent Company Announcements/Highlights
Nothing fundamentally changed about the company to cause a 25% drop in share price over the past two weeks ($13.18 to $9.76). In fact, the company even put out two positive press release regarding a new contract agreement, as well as being awarded ISO certifications which should help the company win more contracts going forward. The recent contract agreement, issuing External Certificate Authority (ECA) credentials to a hospital, was a two-part contract, which encompassed a one-year term, as well as a three-year term.

WidePoint: Unjustified Selloff, Our No. 1 Pick, Here's Why You Should Buy This Dip

Catalysts For WidePoint In 2021: More Profitable, ETF Inclusion, A Takeover Target And More

WidePoint: The $500 Million Contract, Updated Price Targets And Why We've Never Been More Bullish

Yet, despite these positive developments, as well as upcoming catalysts that we outlined in an article in January, shares still dropped 20% the past two weeks. The good news for investors is that shares did so on little volume. In fact, volume has barely surpassed 100,000 over the last several days, compared to average volume around 300,000 over the past month.

This tells us that the recent selloff was not a true selloff because volume was well below normal. Volume is a great indicator of strength and can help identify whether shares are about to rally, stay in an uptrend, or if shares are on the verge of correction. A true jump in share price - or drop - consists of high volume, which more accurately reflects what the market thinks. From our experience, low volume doesn't provide conviction or true market sentiment.

The fact that shares of WYY have dropped on low volume, is at least a positive takeaway for investors who are looking for anything positive after weeks of frustration due to the unwarranted selloff. It's also important to remember that WYY has a low float. Stocks with a small float tend to be more volatile because there are fewer shares available. This often results in larger spreads and with investors piling back into meme stocks, it's likely that some traders got out of WYY just to chase stocks such as GameStop (GME), AMC (AMC) and KOSS (KOSS) to name a few.

ISO Certification
Last week, the company announced that it had been recognized by the International Organization for Standardization ("ISO") for its commitment to quality, environmental, and occupational health and safety. ISO is an independent, non-governmental international organization that produces standards to help improve and ensure quality, efficiency, consistency, and safety of products and services.

It is important to understand that ISO is the body that develops and publishes standards. They do not "certify" or award certifications, which is through external certification bodies.

So what exactly does all this mean? Is it just some PR fluff?

In layman's terms, it's a way for WYY to inform buyers, customers, suppliers and other stakeholders that they are legit and meet the highest standards with their products. While it may not seem like much, it's actually a pretty big deal in the marketplace.

For some organizations, ISO certifications are needed from contractors so they know that whoever they are dealing with, meets specific standards. While we don't know for sure, it's possible that WYY was missing out on some deals because they didn't have ISO certificates. Now that they are certified, this will only open up more opportunities for the company to grow and expand, particularly internationally, along with its subsidiary Soft-ex Communications, which is based in Dublin, Ireland.

We reached out to several sources/experts who told us that organizations should consider achieving ISO certifications if they want to:

Improve international credibility
Work with international suppliers
Improve the company or product quality
Gain customer satisfaction and trust
Reduce waste and save money
Improve the consistency of operations

The ISO certifications that WidePoint was awarded were: 9001:2015, 14001:2015, and 45001:2018. For more details about each of these certifications, click on the URL links that we've provided.

According to WidePoint CEO Jin Kang, the ISO certifications demonstrates the company's commitment to innovation and company longevity.

"At WidePoint, we are always working to improve the quality of our solutions and our organization, and these ISO certifications demonstrate that commitment to innovation. We appreciate ISO recognizing the work we have done to prioritize efficient processes, the health and safety of our employees, and our environmental, social, and governance (ESG) practices. These certificates are an important element of our Green Initiative Policy."

As we noted, obtaining ISO certifications helps improve a company's international credibility as well as its work with international suppliers. And that's exactly what Todd Dzyak, WidePoint President of Mobility Corporation, had to say as he touched on expanding WidePoint's international footprint.

"Earning these ISO certifications illustrates our commitment to providing best-in-class mobility management and provides our clients with even greater assurance that WidePoint and our partners are managing their devices responsibly. As we look to expand our international footprint, having the ISO14001 and ISO 45001 in particular gives us an additional leg up against our competitors. This initiative is a 'win-win' - protecting the environment while generating additional revenue by providing green initiative solutions for our clients."

Lastly, the benefits outweigh the time and costs associated with ISO certification. Getting certified is no easy task and can be a grueling process. However, a study undertaken through the American Society for Quality (ASQ) showed that for every $1 spent on a company's quality management system ("QMS"), that company could expect to see an additional $6 in revenue, a $16 reduction in costs, and a $3 increase in profits. On average, QMS also reduced costs by 4.8%.

Also, an additional study by the Harvard Business School showed that companies that adopted ISO 9001:2015 had the following benefits:

Higher rates of survival
Increased Sales
Growth in employment
Increased wages
Less waste
Improved worker productivity
While many investors and the market simply skipped over this press release, it's actually a bigger deal than most people realize and only adds to the positive momentum/tailwinds and catalysts the company has going for itself.

FedRAMP Certification + Soft-ex Launches In Microsoft Azure Marketplace
FedRAMP certification is another area that WYY has been working on for quite some time now, as it looks to increase and expand its footprint with other government departments and agencies.

While the 2020 Census project and other areas have been getting most of the attention over the past year, FedRamp certification has been largely ignored but is slowly making progress behind the scenes and present a big opportunity for the company going forward.


So what exactly is FedRAMP certification?

FedRAMP stands for "Federal Risk and Authorization Management Program." It standardizes security assessment and authorization for cloud products and services used by U.S. federal agencies. The end goal is to make sure all federal data is protected at a high level.

Because the U.S. government requires all cloud services used by federal agencies to meet FedRAMP security standards, getting authorization is often rigorous, needed and a very important step for any organization.

FedRAMP has been around since 2012, however, it didn't really take off until a couple of years ago. In fact, only 20 cloud service offerings were authorized in the first four years. However, the pace has quickly accelerated with more than 200 cloud products now available.

Once service providers are authorized, they are listed in the FedRAMP Marketplace. This marketplace is the first stop government agencies look at when looking over new cloud-based solutions. The process is designed for agencies to use a product that's already authorized than to start the authorization process with a new vendor.

Because of this, companies who are already in the FedRAMP marketplace have a leg up on the competition and have a better shot at getting additional business from government agencies. Getting listed also improve a company's profile in the private sector because the marketplace is visible to the general public.

During the question and answer portion of the Needham Conference in January, WidePoint CEO Jin Kang gave investors an update on the FedRAMP certification process. Here's what he had to say:

"FedRAMP certification is going well. Now that we have won the DHS contract, we are in the process of getting the sponsorship so that we can complete the FedRAMP certification. In order to continue to speed up that process, we've engaged in a third-party certification authority to make sure we meet all the requirements. We are putting everything together so that we can speed up the process. DHS has stated that held up the sponsorship because the contract was in the process of renewing. Now that the contract has been renewed, we foresee DHS will issue the sponsorship and we should be able to finish certification in the next 12 months.

With the $500 million DHS contract renewed last November, the company has been able to move forward to obtaining FedRAMP authorization. It's expected that WYY will receive certification before the end of the year. This certification will help shorten the selling process and with WYY having a foothold in several agencies already, we wouldn't be surprised to see the company see a big jump in federal sales starting in 2022.

Soft-ex Joins Microsoft Azure Marketplace
WYY's subsidiary Soft-ex, has been firing on all cylinders lately as the company announced several contract wins last December, and then announced in January that it joined the Microsoft Azure Marketplace.

Microsoft's commercial marketplace is available in more than 100 countries and regions, and allows company's to market and connect with more than 3 million monthly users.

This is great news for investors as it is a big door opener for the company to continue to grow and expand its footprint on a global scale.

Conclusion
Investors have been flooding into value stocks and recovery plays (airlines, cruises, hotels, etc.) as many ditch high-flying tech stocks and adjust their portfolios to a post-pandemic world. With COVID-19 rates coming down dramatically and with the White House moving up its vaccine supply timeline, many have become very optimistic about the recovery in the U.S. economy this year.

Economic data continues to improve with GDP forecasts soaring in recent weeks. According to Bank of America, GDP is expected to grow 8% in the second quarter, 11% in the third quarter and 5% for the fourth quarter. This is evident with rising yields which are the result of the strength in the economy.

But that's exactly why the 20% drop in share price in WYY doesn't make sense. The company is both a value and a growth play at the moment. The company is debt free, cash flow positive and is on track to grow revenues 95% year-over-year ($200M) when the company reports fourth quarter and full-year 2020 financial results later this month. The company had $11.4 million in cash at the end of Q3, and will likely have around $14-$15 million when earnings come out in a few weeks. With a market cap just over $95 million, total cash represents 15% of the company's total market cap.

ChartData by YCharts
The company is trading at a ridiculous price-to-sales ratio of 0.47. This is insanely cheap for a company that is about to report full-year 2020 revenue growth of nearly 100%.

WYY is arguably in the strongest position that it has ever been, and yet, it's valuation is less than what it was in 2017 and 2018, which included several challenges at that time, including a new management team.

Another important factor to consider is that the drop in COVID-19 cases and the reopening of the economy is another tailwind for the company. In fact, Texas just announced that starting on March 10, masks will no longer be mandated. So how does this help WYY?

Investors should remember that the company has an agreement with SYNNEX, which has the potential to be a huge revenue driver for the company. However, due to the global pandemic, it has complicated and delayed training for 800+ SYNNEX resellers who will be selling and issuing WYY's Identity Management solutions ("IdM"). With COVID-19 slowing down, we expect WYY to make a lot of progress on this front.

Bull Case: $30.00 (193% upside)
Despite the market selloff, we keep our bull case at $30 due to the opportunities that are still in play for WYY. Once again, nothing has fundamentally changed about the company over the past two weeks to justify the selloff. WYY has an excellent balance sheet that will only get better thanks to better margins surrounding its $500 million DHS contract with the U.S. government. As a reminder, this contract accounts for just over half of the company's total revenues.

Also, there are still a number of catalysts and potential catalysts in play this year. ETF inclusion with HACK once WYY meets the market cap threshold ($95 million), possible Russell 2000 inclusion in June, FedRAMP certification which will come before the end of the year, recent ISO certification to help the company push more into international expansion, as well as its SYNNEX (SNX) partnership to expand sales of its TM2 solutions. Again, there is still a lot to like in 2021. With a low share float (8.5 million), combined with a market recovery after a 10% correction, we still believe shares could hit our bull case by the end of the year if everything goes right.

Base Case: $20.00 (95% upside)
The biggest difference from our bull case, is that our base case scenario does not assume the company will get added to the HACK ETF, or Russell indexes this year. While we do believe that WYY will be included in these, our $20 base case scenario is strictly on fundamentals alone.

When the company reports fourth quarter and full-year 2020 earnings later this month, it's likely that WYY will post total revenues of around $200 million. This would represent roughly a 100% increase year-over-year on the top line. While a chunk of the increase is due to the 2020 Census - which is mostly a one-year event - the company is still growing and bringing in other existing/new contracts. This year, we believe 2021 revenues could come in around $150 million, which compared to 2019 ($101.7M), would be growth of nearly 50% over a two-year period. Also, it's important to remember that since new management took over in 2017, the company has consistently delivered a 33% compound annual growth rate ("CAGR"). Management has consistently delivered on its promises and there's no reason to think they won't do so again.

Lastly, most companies in the information technology sector trade anywhere from 1-to-3 times forward sales. Our $20 price target currently has WYY trading at the very low end of that range with a forward P/S of 1.1.

Below is a breakdown on how much shares would be worth if the company traded at 1X, 2X and 3X forward sales (2021). Also, these projections don't even factor in a profitable and immediate accretive acquisition which management hopes to do this year if the right opportunity comes along. As you can see, Wall Street is still severely underestimating the company at the moment.

WidePoint Share Price
1X Sales (2021) $18.24
2X Sales (2021) $36.47
3X Sales (2021) $54.70
Bear Case: $9.00 (11% downside)
Short interest hasn't changed much as it continues to fluctuate between 1%-2% over the past two months. During this same time frame, shares have climbed from $10 to as high as $15. The fact that short interest hasn't spiked, or even moved, tells us that even the bears know that shares are still relatively undervalued at that level.

The only concerns going forward for investors is whether or not the company can continue to grow its high-margin business (managed services) for the foreseeable future as it expands more into the commercial space. With the current trajectory, as well as the things that are in place (partnerships, etc.), we firmly believe the company will be able to do so.

Also, management has also mentioned that they are looking at the possibility to do an acquisition if the right opportunity comes along. It's important to note that only companies that are profitable and that will be immediate accretive will only be considered. There is a possibility of WYY tapping its $24 million at-the-market offering if the company they are looking to acquire comes at a higher price. However, as WidePoint's CEO has stated multiple times, the ATM will be the last resort if they do proceed to go that route.

Bottom line: Our followers know that we've been bullish on WYY for a long time now and recent events and announcements have made us more bullish than ever before. With strong fundamentals and with so many tailwinds this year, buying the WYY dip is an absolute no brainer at current levels. As of right now, investors could lose as much as 11% in our bear case scenario, but could also see gains of 95% and 193% in our base and bull case scenarios. We like our chances with WYY and have continued to add to our position. The market was due for a correction and we just got it. But just like all pullbacks/corrections over the years, the markets went on to make all-time highs weeks/months/years later. And for those wanting and looking to buy near the bottom, this is your chance.

And while management is actively looking to make an acquisition this year, they may very well find themselves receiving a buyout offer this year as well.

Risk Factors
With a market cap just under $100 million, WYY currently falls into the micro-cap sector. Companies in this range come with a higher degree of risk compared to more well known and established companies. And with a low float, shares can move quickly in either direction.

Because WYY competes in a competitive market and against both private and public companies, some competitors are able to offer more scale, which can enable them to significantly discount their services in order to maintain market share. If the company has to resort to deals with lower margins, profitability would suffer. Lastly, WYY's revenue from government contracts is quite large. A change in government spending policies or budget priorities could cause the company to lose revenues. The loss of any contract would also have big implications for the company.

This article was written by

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