I believe that IDEX is a company without a clear identity and vision.
IDEX's transition towards blockchain and fintech is bewildering.
Currently, the company's main revenue contributors are crude oil trading and consumer electronics.
Despite this, IDEX remains a troubled company that is burning cash at an alarming pace.
In my view, IDEX is extremely overvalued.
Ideanomics (NASDAQ: IDEX) is a small company that appears to have an identity crisis. It previously operated in the “video on demand” niche. However, since then, it has evolved into a holding company with a wide range of operations from blockchain and AI to crude oil trading. Still, in my view, IDEX’s recent transition towards fintech has virtually nothing tangible to offer to investors. Thus, I believe it’s probably best to outright avoid the stock.
Ideanomics is an interesting company that has changed over the years in very peculiar ways. You see, IDEX is, on paper, a video content distributor through its YOD segment. However, in practice, this segment appears to be discontinued as it no longer produces any material revenues for the company (about 0%). So what does IDEX do? Well, it’s not that clear. According to management, in 2017, IDEX ditched its focus on YOD to pivot to fintech. This was an intriguing decision because it coincided with the bitcoin bubble of 2017. After all, IDEX had nothing to do with fintech or blockchain before this development.
Source: IDEX, 2018, 10-K filing. IDEX has a complicated corporate structure. Also, the VIE arrangement offers little transparency to shareholders.
So, one could argue that IDEX pivoted because it was jumping into the hot new trend of the moment (reminiscent of Kodak (KODK)). In fact, after closer inspection, there was no real business opportunity behind this decision. In my view, this is reminiscent of the dot com bubble. Back then, many companies simply added “.com” to their names and their stock prices soared. This is typical of manias, and I think that in 2017 bitcoin and blockchain were no different. Thus, quite frankly, I don’t see any other reason why IDEX made such a jump from video on demand to blockchain and fintech in 2017.
So what now?
The reality is that at a glance it appears that its blockchain angle is entirely improvised. After all, it has had the segment for approximately two years now, and so far there's nothing concrete for shareholders. IDEX’s only tangible evidence of something related to blockchain or fintech is its crude oil trading segment. Yes, you read that right: IDEX (originally a VOD company) also trades crude oil now. In fact, it’s its most significant revenue contributor.
As you can see, IDEX’s most significant revenue source is its crude oil trading segment. Why does IDEX trade crude oil? Well, management claims that this is a great learning experience for them before implementing blockchain and fintech solutions in the sector (see the link above). In my view, the tokenization of assets via blockchain is an up-and-coming market opportunity. After all, as you might expect, this can potentially reduce transaction costs, improve security, and remove intermediaries, to name a few benefits. However, these applications are still in their infancy, and so far, IDEX is no different. Nevertheless, for the time being, IDEX is now primarily a crude oil trading operation.
Source: Import Genius. Amar is IDEX’s consumer electronics subsidiary. The Russian text in the cargo description translates to “Telephone apparatus (…) for cellular communications or other wireless communication networks (…).”
Still, that’s not all that IDEX is doing. As you can see, the company also receives revenues from its “consumer electronics” segment. Management is also “trading” this segment (like with its crude oil operations) with the same intentions of “learning” for a potential fintech/blockchain application. However, in reality, this segment is merely importing and exporting consumer electronics, which are most likely cellphones and other wireless devices.
So, why would IDEX market itself as a blockchain company? Naturally, I can’t speak about management’s state of mind when they made this decision. However, I’ll offer the reader a plausible alternative. You see, in 2017 the bitcoin bubble seduced many companies into the blockchain frenzy. At that time, anything that added “blockchain” or “coin” to its operations soared due to speculation. IDEX itself rose to a multiyear high of roughly $6 per share during the zenith of the bitcoin bubble. In my view, maybe management thought that this move would be suitable for shareholders. I suppose that over the short term it provided with some nice unrealized gains. However, I remain skeptical about IDEX’s blockchain/AI/fintech prospects. Caveat emptor.
Source: IDEX, 2018 10-K filing.
So how does this tie into with R&D of new blockchain and fintech applications? Well, as of today, IDEX’s trading operations with crude or consumer electronics have absolutely nothing to do with blockchain or fintech. They are only a promise that someday, somehow, IDEX will develop a trading application for these tokenized assets. In a way, this reminds me of the typical biotech company that only burns cash (more on this later) in the pursuit of a breakthrough that could translate into a windfall for shareholders.
I think that the concept of securitized tokens is potentially revolutionary. However, what blockchain technology is great for is for decentralization. The problem is that IDEX’s angle of developing a platform wouldn’t be decentralized. In other words, if a government wanted to shut down whatever blockchain application that IDEX develops, it would be entirely possible. You see, unlike bitcoin, IDEX’s tokens would have a single point of failure (IDEX itself). This is why I don’t think it makes sense to use blockchain when ultimately there's going to be a centralized entity managing it. Hence, I believe that IDEX has a fundamentally flawed approach.
Cash burn and valuation
Ultimately, the only tangible thing that IDEX has is a phenomenal cash burn rate. For context, in 2018, the company burned almost $30 million with its negative FCF. This is a huge figure when compared to its total assets of $146 million and its cash reserves of only $2 million! In fact, the cash burn rate is so excessive that bankruptcy is a real possibility unless the company raises additional cash from debt or equity.
As you can see, even IDEX itself acknowledges that it’s borderline bankrupt. Nevertheless, the shares appear to be trading at a premium. You see, IDEX’s book value is a mere $5.56 million. This is because its assets are inflated due to “intangibles” of $68.39 million. Thus, its tangible book value is $146.22 (assets) - $68.39 (intangibles) – $72.26 (total liabilities) = $5.57 million. Therefore, IDEX is currently trading at a whopping PB ratio of 32 while being on the verge of bankruptcy!
In my view, IDEX should trade at the most at twice its book value. I believe this would still be generous, but if you price it as a call option on a successful blockchain application, I suppose it could make some sense. This would imply a fair value of $0.05 per share. However, in my opinion, IDEX’s current valuation of $1.65 per share is outright nonsensical.
IDEX’s blockchain and fintech intentions have so far produced nothing concrete. Based on this reason alone, I’d argue that IDEX isn’t a viable investment. However, on top of that, I think the company lacks identity and vision, which is why it changed its tune when the bitcoin bubble came along. Also, I believe that it’s trading way above any rational valuation. So, all in all, I’d advise investors to pass up on IDEX. However, I must also stress the fact that IDEX appears to trade based on hype and speculation. Thus, I’d caution investors against shorting the stock as well. After all, it’s not wise to bet against the power of a – seemingly – good story.
Thank you for reading, and good luck.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
I believe that IDEX is a company without a clear identity and vision.
IDEX’s transition towards blockchain and fintech is bewildering.Currently, the company’s main revenue contributors are crude oil trading […]