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Who’s getting rich from “The $33 Billion Gold Chip Mandate?”

What stock is being teased by Small-Cap Rocket Alert?

By Travis Johnson, Stock Gumshoe, December 10, 2015

This ad for Sid Riggs’ Small-Cap Rocket Alert has been pitched a bunch of different ways — starting in August with the promise that they had some special way to get in early with a “royalty” on these “gold chips” that are being sent out (the new EMV chips in credit cards that are beginning to replace magnetic stripes in the US this year), and that seems to have been mostly huff-puffery… it’s pretty clear they were probably just recommending that folks simply buy the stock in CPI Card Group (PMTS) at or near the IPO.

And now they seem to think it’s worth buying still, because of their large market share in this business and the huge demand still for new cards as more banks convert to the “gold chip” EMV cards. There was a little uncertainty in the teaser solution article I’ve appended below, but that uncertainty is now gone — clearly, now that the stock is public and the ad has morphed slightly to reflect that, they’re continuing to tease CPI Card Group shares as an investment they like.

The IPO talk about this one back in the Summer was for pricing at $16-18 a share, but the expectations were dropping even as the original ad ran (and as we covered it in August), the expectations dropped to $12-13/share, and then the IPO actually went off at $10 a share. It jumped back up to $12 or so for a little while, perhaps the ad campaign from Sid Riggs’ publisher helped to boost that attention… and then it dropped back down again, so now the price looks quite a bit better now than it did a few months ago (to me, at least) — following a decent but not very sexy first earnings report two weeks ago, analysts think they’ll earn close to a dollar a share this year and next year. Even though I don’t expect that their growth will be substantial from that level, it’s not entirely unreasonable to pay roughly 10X earnings for a profitable company with slow earnings growth.

There are debt issues, helped somewhat by the IPO and by a new loan facility that were used to refinance some debt and retire some preferred shares (lots of this is still not entirely clear in the filings, since the September quarter data they reported in November does not include the impact of the IPO or their new debt), and it’s still a new IPO that was private equity-backed so there could certainly be additional follow-on offerings or insider sales after the lockup period ends in a few months, and that could bring the price down again… but the price is no longer ridiculous or assuming huge earnings growth beyond this “national conversion” spike in demand for new cards.

But if you want the full story of the ad, which is mostly the same as it was back in August, I’ll share that with you — don’t want to rewrite the same teaser solution or make you sit through the whole thing, but it’s here if you want it… and we’ve left all the original comments as well so you can see the thoughts of other Gumshoe readers.

The following was originally published when the ad started running in mid-August — it has not been updated since we first published it on August 19, though there are many comments added at the end by myself and other readers.

—from 8/19/15—

These are the kinds of ads that made me start researching newsletter teasers almost ten years ago, and that spurred the creation of Stock Gumshoe — a mysterious and secret investment, a nondescript building that holds the future of your portfolio in its hidden recesses, a big and lucrative transition that no one else sees coming… man, it’s almost textbook.

Though I have to start with a small caveat — this ad from Small-Cap Rocket Alert didn’t lend itself to a clean “solution” like the ones I can usually provide with the help of the Thinkolator… but we will at least think it through with you, present some of the ideas, and share a few names.

My favorite part, of course, is the “secret” location stuff, even though that’s not particularly germane to the actual investing idea… let me start you out with that, since it’s what caught my eye. The “gold chips” stuff is the headline, with a few pages of blather to get you interested in the 575 million “gold chips” that will be sent out to US households by the end of this year…

“575 million Gold Chips will be issued in America by December 31, 2015…

“And one company has a near monopoly on their production….

“It operates in the middle of an industrial park inside this discreet 50,000 square-foot facility in Littleton, Colorado.

“And it will be responsible for producing the vast majority of all gold chips that will be circulated across the entire United States. This small company will control up to 70% of the total U.S. market.”

Those gold chips are, as you would have realized if you read through the ad, the new microchips that are gradually replacing the magnetic strips on your credit cards (it’s OK, we know that no one can tolerate reading through the whole ad or, worse, sitting through the “video presentation” … that’s why we do it for you. If that’s not love, what is?)

These are the chips that are probably in your credit card now, and they do look like a little square of gold foil — they’re the eventual replacement for those magnetic stripes, and they’re already used in most other countries but are finally getting a widespread rollout in the US. Instead of swiping the stripe on your card, you insert it in a little terminal and the microchip is accessed and creates a one-time coded transaction — in most countries, the signature has also been replaced by a PIN code for enhanced security, but that’s not necessarily happening immediately in the US. These aren’t quite the same thing as RFID chips, though they’re similar in many ways and it may be similar basic technology — from what I can tell they don’t transmit the data nearly as far, so they’re not necessarily intended in every case to be “contactless,” this is really for better security rather than more convenience, with the security largely coming from the fact that (unlike the stripe) the chip doesn’t store a lot of static data that could be stolen but generates a one-time transaction code for the retailer each time it’s used.

And there is a big move to convert to these chip-enabled cards, largely for security reasons — that’s because after similar technology has pretty dramatically reduced credit card fraud in Europe, the big card networks are essentially forcing the move, with a deadline this Fall: liability will shift to the participant that has the lesser technology, so both banks and retailers are incentivized to upgrade — banks will send out cards with those chips in them, and retailers will buy terminals that can handle the chips, otherwise they’ll face more potential liability for fraudulent charges. Here’s a description of what that means from a Mastercard spokesperson, in a WSJ article last hear (right, Wall Street Journal — this is not secret stuff):

“Part of the October 2015 deadline in our roadmap is what’s known as the ‘liability shift.’ Whenever card fraud happens, we need to determine who is liable for the costs. When the liability shift happens, what will change is that if there is an incidence of card fraud, whichever party has the lesser technology will bear the liability.

“So if a merchant is still using the old system, they can still run a transaction with a swipe and a signature. But they will be liable for any fraudulent transactions if the customer has a chip card. And the same goes the other way – if the merchant has a new terminal, but the bank hasn’t issued a chip and PIN card to the customer, the bank would be liable.

“The key point of a liability shift is not actually to shift liability around the market. It’s to create co-ordination in the market, so you have issuers and merchants investing in the migration at the same time. This way, we’re not shifting fraud around within the system; we’re driving fraud out of the system.”

And who is this “secret” company in Littleton, Colorado that’s going to be making a lot of these “gold chips?”

That’s privately held CPI Card Group, which has indeed filed for an IPO but hasn’t set a date or priced it yet — they’re owned by private equity firm Tricor Pacific Capital, and they also were on the verge of trying to go public early in 2014 but pulled back for whatever reason. CPI is a card manufacturer — they’re the ones who make, print and personalize the cards and mail them out to you, as a contractor working with your bank, and they are a major, if not the major, card maker/printer in the US. But, of course, you can’t invest in them directly… not yet, at least, and we don’t really know what the valuation will be. The S-1 says they had about $260 million in revenue last year, and were profitable with about $13 million in earnings, and that they’d like to raise up to $100 million in the IPO… but it’s not clear what percentage of the company that will be, whether it’s new money or just Tricor selling out, etc… early days on that front.

It’s also, frankly, possibly bad news for CPI Card Group that this transition to EMV cards is happening — not bad this year, because it should spur a huge volume in sales as everyone has to get new cards all at once, but in future years. If durability and security are really far better for EMV cards, as is expected to be the case, then the expiration dates for individual cards might push further out into the future. If cards last longer, banks need to order fewer replacement cards and CPI Group’s recurring market shrinks. It might be that Tricor is selling out at just the right time, frankly, since unless there’s something else going on in the marketplace you’d really expect 2015 or possibly 2016, if there’s some lag, to be the peak year for card issuance.

But the teaser pitch isn’t really about buying CPI Card Group, because you can’t do that now — and why would you subscribe to a newsletter to learn about something you could maybe possibly buy in the future? That’s now how ads work — they need urgency, or you won’t act.

More from the ad:

“I have to mention that there is a ‘catch.’

“99.9% of investors will never be able to capitalize on the small company with a near-monopoly on the U.S. distribution of gold chips…

“Because it is privately owned.

“So you can’t purchase their stock on the NASDAQ, DOW, or any major U.S. or foreign exchange.

“You can’t even secure shares on the OTCs or Pink Sheets….

“But here’s the great news…

“You won’t have to wait until that happens to take advantage of the $8 billion gold chip bonanza that’s headed their way.

“Because today you will be able to take part in a very rare opportunity.

“You can receive a digital prospectus that reveals a unique way to grab a small piece of each gold chip they distribute… it’s essentially a ‘patent stake.'”

So what is that “unique way” that you can profit from this company’s surge in revenue, or take something like a “patent stake?” Is this really some kind of private deal, as is implied by this “digital prospectus,” or is this just a shrouded reference to something that is actually available to everybody?

Well, I can’t tell you for sure. Sorry, but the Thinkolator is striking out on this one — there are some patent licensing firms that have RFID patents and that meet the general price criteria (around $10), like Acacia Research (ACTG), but I haven’t noticed anyone in particular citing that specific patent or paying a license fee for it (that’s not necessarily unusual, often in press releases and financial filings a group of patents will be licensed, not a single specific patent)

The only key licenses that I noticed CPI using, as cited in their S-1 filing, were from MULTOS, which is an operating system for smart cards, and Oracle — MULTOS technology is at least partly controlled by Gemalto, the Dutch security company (GTOFF or GTOMY in the US), but that’s not likely to be the teased company… even if they receive license payments from CPI that wouldn’t be particularly material to their results. Interesting stock, but not likely what’s being teased here. It could well be that CPI is paying licensing fees to one of the several IP companies, whether Acacia or another, but I didn’t see any particular connection to

“… through these patent stakes you can receive a tiny piece of the profits from each gold chip… every single one of them….

“We are not trying to pitch you to raise funds for their IPO.

“We have vetted this opportunity for the last six months and believe it is so lucrative that a relatively modest $2,000 investment could initially grow to $100,000 before shooting up even further.”

So it sounds like some kind of private financing deal… but the last couple times this publisher pitched “private” investments, well, they were dissembling a bit (that was Stellar Biotech, which was already public… just not in the US… and the publicly available SharesPost 100 Fund)… so I’m a little suspicious, but the clues are thin here. More to guide the Thinkolator…

We are told about what they imply is the key patent behind this technology — which seems a stretch to me, given that the patent they reference…

“This is Patent No: 7034689.

“It’s for the gold chip microprocessor.

“If you look closely, you’ll see a diagram that is outlining the cryptogram feature that makes it impossible for criminals to steal your money and identity.

“This patent is necessary to build and distribute every gold chip.”

That particular patent, filed by inventors Bertrand Teplitxky and Lawrence Martinelli, was intended to provide more secure packaging using RFID technology — maybe something in the technology applies to these EMV card transactions, I don’t know, but I don’t see it noted elsewhere as a key payments technology patent and it hasn’t been cited by many patents other than those that are also focused on secure packaging technologies. They’ve also partnered in the past with Inside Secure (ISDCF), a much smaller European firm, to develop EMV card products, but I don’t know if that particular partnership still exists or generates licensing fees (their price is no match for the tease, either).

So with that one, I’m going to leave you at least somewhat frustrated — maybe they are actually doing some sort of private placement, or recommending a non-stock investment in patent rights, but I suspect it’s just a publicly traded stock that they’re recommending and I simply haven’t identified it yet. So if there’s a specific royalty/licensing play on CPI Card Group’s EMV (“gold chip”) cards that is being teased, we’re still looking — and if you have ideas, feel free to chime in with a comment below. The only stock I came across that seemed at all tempting to me in that search was Gemalto, so I might follow up with that one in the future… but nothing else caught my eye as compelling or as a close match for the pitch.

But I won’t leave you completely bereft of ideas — there are a couple things that were also teased in the ad:

“One of our latest opportunities involves a firm that has developed a new technology known as ‘Traffic Visibility Networking.’

“This is a pure big data play.

“Traffic Visibility Networking is a technology that allows a company to analyze their internet traffic to uncover patterns and opportunities.

“And this small-cap company controls a 90% market share of this fast-growing industry.

“Their client list includes 59 of the Fortune 100 companies, including top retailers like Costco,Target, and Wal-Mart.

“For these large companies, optimizing the customers on their websites can create hundreds of millions of dollars in additional profits.

“And this small firm is already creating fast gains for our members.

“So far its share price has jumped 120%. But I’m expecting 10 times that return as the company continues to dominate this market.”

This is almost certainly Gigamon (GIMO), which has indeed jumped 120% if you bought at the right time (last year) — though it’s down 20% or so from the highs of a few months ago. They’re in the final burst of becoming profitable this year, so their growth numbers look crazy (several hundred percent), but really analysts are expecting about 25-30% earnings growth (also quite impressive) and it’s trading for about 30X their estimated 2016 earnings… so if the growth is reasonably likely to occur, that’s probably a decent valuation. I don’t know anything else about the company and, to be honest, I don’t even really understand what “Traffic Visibility Networking” is, though I suppose it’s probably something I should be doing with

One more?

“A few months back, I released a Small-Cap Rocket Alert investment briefing that revealed a single play that allowed everyday investors to profit from a steady stream of royalties from five of the most profitable new drugs on the market…”

I won’t bore you with the details, but he cites Promacta, Avinza, Aprela, Kyprolis and Nexterone… so this is Ligand Pharmaceuticals (LGND), a very volatile pharmaceutical royalty generation company which I own and have written about a bunch of times for the Irregulars.

And another that’s more on topic with this “gold chip” business …

“One Company is Set to Reap the Lion’s Share of the $25 Billion Being Spent on Gold Chip-Enhanced Terminals and ATM Machines.

“Today, there are 13.9 million credit card terminals in America.

“However, only 15% of these terminals and 21% of ATMs have been upgraded to accept gold chip cards.

“But banks and retailers will have to spend $25 billion to quickly deploy enhanced terminals to all of their locations between now and 2017.

“And one tiny company has partnered with the largest payment processor in America to provide new gold chip terminals to retailers throughout the U.S.

“By next year I wouldn’t be surprised if their stock grew 10-fold.”

The logical solution here is Verifone (PAY), the largest pure-play payment terminal company, or Global Payments (GPN) — but with a $4 billion market cap for PAY and $7 billion for GPN, and an extremely competitive environment with lots of smaller (and diversified) players, it’s essentially impossible for a market leader to have their stock grow 10-fold without some revolutionary change. So either that’s a ridiculous promise, or they’re touting some far, far smaller terminal provider and expecting that access to a large payment processor network will give them a huge boost in sales.

There are some small companies like that, including Clover, which has partnered with First Data… but Clover isn’t public. Or Pax Technology, which has partnered with Heartland, but Pax is traded mostly in Hong Kong (also at PXGYF on the pink sheets). So we’re again thwarted in terms of details on this one so far, but there are a few to think about if you’re interested in trying to play this technology shift.

And we’ll close with just a bit more of the tease about the size of this shift to EMV “gold chip” cards…

The market is big, at least for this year — and the higher costs of these chips (versus magnetic stripes) may enable the providers to keep margins up a bit in future years as well… here’s a bit more from the ad on the size of the opportunity, in case you’re curious:

“… putting a high-powered microcomputer inside every credit card is not cheap…

“A typical credit card costs $0.25 to manufacture.

“Your average gold chip card costs $2.50 – that’s 10 times more.

“But some of them cost $10, depending on if they’re embedded in cards that are loaded with perks, such as some of the more exclusive offerings from American Express.

“In total, banks are spending $8 billion to issue new gold chip cards.

“Merchants will have to fork out over $25 billion to upgrade to new credit card terminals.

“In total that’s a $33 billion initiative to help ensure your financial security and identity is safe and sound.

“And it’s an expense that every business in America has no choice but to incur…

“If they don’t want to get stuck footing the bill if they get hacked.

“And the gold chip is the only technology proven to eliminate credit card fraud.

“But it’s not just private companies who are turning to it.

“In an effort to jumpstart distribution, the U.S. government is now issuing millions of gold chips to its own employees…

“In fact, a White House executive order states that every credit card issued through federal programs must now have a gold chip inside of it. This includes Social Security cards, Supplemental Security Income cards, as well as programs for veterans.”

So is this really a huge opportunity, as we close in to about six weeks away from the deadline? Or have all the big purchases of cards and terminals been made, and we’re already seeing this business plateau? I can tell you that this is certainly a transition that’s been talked about among financial pundits for a couple years now, with the occasional tease or recommendation thrown in (mostly for the terminal makers, like Verifone), and that this wave of conversions is very much a known thing when it comes to the banks and card issuers.

It worries me that we’re seeing aggressive pitches for this right now, because if the incentives are working for retailers and banks (and they probably are), then this is a big, nationwide conversion that’s probably going to be mostly complete by this time next year — there’s not necessarily a surprise wave of cash to come flowing for Verifone or their competitors, though it’s true that the US retailer marketplace is very diffuse, with lots and lots of small businesses who probably have NOT yet converted — Sears and McDonald’s and Home Depot doubtless already have the new terminals, or have them on order for installation within weeks now, but Joe’s Hardware Store might not have it yet… and likewise, all my cards from big banks have already been replaced by chipped cards, but my local savings bank card hasn’t yet been upgraded.

It’s tough to guess what that means for the market opportunity, but what’s tougher is to guess what kind of market opportunity there is for these card and terminal makers after all the cards have been converted… there is competition and margin pressure everywhere in this market, and presumably they return to some previous state of recurring revenues just from replacements and incremental new business openings and new cardholders. That’s not as sexy, so if you’re investing in this opportunity as a “wave” you want to catch, be careful to watch for what happens after the wave crashes on shore and everyone’s all wet — is another wave coming, or has the tide receded?

Well, that’s a lot of words without a lot of definitive ideas for you… sorry, sometimes that’s how the teasers crumble. If I get some better thoughts, I’ll share them — and if you have some of your own, I’d be delighted to hear them, just leave a comment below. Thanks!

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7 years ago

Genetic ‘editing’ could help treat PML: This is awesome; if they can pull it off. Best2U-Ben

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7 years ago

ONCE- Spark Therapeutics Announces Presentation of Additional Phase 3 and Durability Data on SPK-RPE65 at The Retina Society 48th Annual Scientific Meeting:
Quite a bit of insider selling in the last couple of days: Best2All!-Ben

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