In the interview, Mark said that it took 3 years for MGM to come...

In the interview, Mark said that it took 3 years for MGM to come up with their first device which proved to be unreliable. Unreliable sounds like a lot of our cheaper competitors’ devices. The difference is that MGM did not release that device onto the market but instead started over until they developed the current version for which “the lab tests were showing that the reception was actually a lot better than a mobile phone”. By doing this they avoided giving their product a reputation of being sub-standard in quality and then having to try and improve on that reputation over time which is what our competitors would need to try and do.
The time it took to develop a high quality/high security device says a lot with regards to how difficult it might be for new competitors to bring high quality devices into the market in the short term. Also on the subject of competitors, the following is an extract from a Gleneagle report;
Specific Absorption Rate (SAR) and Australian RCM accreditation
Radio Frequency (RF) transmitters used in close proximity to the human body must be evaluated against
human exposure standards which set basic restrictions for the Specific Absorption Rate (SAR) of RF energy by any part of the human body. This may include two-way radios, cellular phones, smart phones, spread
spectrum, Bluetooth devices and WLAN devices used in mobile devices. Virtually all devices exceeding the
power threshold of 20mW (13dBm) and used in close proximity to the human body must comply with SAR
requirements. Within Australia the Regulatory Compliance Mark (RCM) serves as evidence that the product meets SAR and other electric safety standards and the logo must appear on the product.
SPACETALK has the RCM accreditation in Australia and European Certification (EC) while we have found no evidence that several other domestic competitors have RCM accreditation. As a result they are not certified for sale within Australia and are at risk of being banned.
And;
In October 2017, the Norwegian Consumer Council (NCC) published a review of four smartwatches for sale in Norway and lodged a formal complaint over three. Their tests revealed serious security and privacy risks and poor reliability which resulted in these specific brands being banned in Germany and several UK stores
removing the smartwatches from sale. A formal complaint was lodged over:
Gator 2
Xplora
Viksfjord
From that same Gleneagle report I also found this;
Depending on manufactured volumes and exchange rates we forecast a landed cost range of $100 (low
volume) down to $75 for high volume production. We estimate a wholesale price of slightly above $200 to
large bricks and mortar retailers – but use $200 as a conservative modelling assumption. We arrive at gross margins of 50% to 62% on wholesale sales and over 69% via its AllMyTribe online store.

Now that they are ordering higher volumes, gross margin per watch sold through B&M could be between $100-125 per watch. Watches sold through Allmytribe at $317 (ex gst) would have a gross profit margin of $217-242.
That is in line with what I estimated previously using the 2018 prelim results. I had estimated $119 gross profit per watch on sales through retailers and $213 per watch through MGM’s own online sales.
My current base case assumption is that current seasonally adjusted sales average 1.5 watches per week per JB store (much higher through the Christmas/back to school period) x 197 JB stores, just one watch every three weeks for Leading Edge stores x 15 stores (this could be way too conservative), 1 per Spark outlet per week x 73 outlets. I also think this will be way too conservative given the monthly plan they offer. Then I assume Spark sells a further 500 per year online, JB sells 3,600 per year online and Allmytribe sells 3150 per year online – in line with recent rates of sales for Allmytribe.
If that is the current, seasonally adjusted rate of sales, it would work out to a healthy 26,500 per year. That does not allow for growth in sales over time. Gartner estimates sales of kid’s smart watches to grow from around 12 mill units in 2018 to 24mill by 2021. That is a compound rate of growth of 27% per year. So in 12 months, the same store sales would be expected to grow from 26,500 to 33,600 units per year. Therefore, same store units sold over the next year should be around 30,000 if assuming a seasonally adjusted current rate of 26,500 per year. There is every chance that store numbers will increase in both Australia as JB’s exclusivity ends and in NZ as Spark signs distribution deals with other retailers. In my base case modelling, I have used 33,800 watches sold over the next 12 months for Australia and NZ and that may prove conservative. I think 40,000 is possible.
In my modelling, I have increased salaries and advertising costs by 950,000 over last year’s amounts. I’ve allowed 1.8mill amortisation/depreciation (same as 2018).
On 33,800 watches my base case sp target is $4.12 with no allowance for Europe. If sales reach 40,000 watches per year, my target increases to $8.44 - again with no allowance for Europe.
I now come back to European potential. In the MMM radio interview this week, Mark has repeated that;
“Next year we expect to be selling it into Europe…. the company’s got a big future ahead of it.”
There is no sign of doubt in his language about Europe. Everything we have heard and read shows the company fully expects to be selling into Europe next year and he has previously guided on early next year.
There is no way this is priced in currently. UK (66mill) and Germany (82mill), two reasonably wealthy Euro countries, have a combined population five times that of Aust and NZ. Sales into just these two Euro countries have the potential to increase our sales from 33-40,000 per year to 165,000 – 200,000 watches per year. Even if sales rates per head of population in UK and Germany are only half- three quarters that of Australia’s, adding another couple of Euro countries would compensate and bring sales potential back up to 200,000 per year.
If MGM was to sell 200,000 watches per year, my estimate of NPAT is $21mill and for a PE of 20, my target would be $34 per share. If 200,000 per year sounds high, remember that Gleneagle (May 2018) has estimated that the market leader in Australia for smart phone watches would have 183,750 users in its second year (sales of over 90,000 per year - Australia only). 200,000 per year for combined Australia, NZ and European sales would be very conservative compared to Gleneagles estimates for Australia only.
Buying into current market weakness and volatility should pay off extremely well over the next year IMO and regardless of current market weakness, MGM shares should perform extremely well over the next year.
There is always risk over a longer timeframe of competitors coming out with similar quality products but there is also first mover advantage, reputation of quality and security and plenty of room for growth through other European countries for us and competitors. Consider the following;
“The kids’ category (30% of total smartwatch sales) is forecasted to have a market size in 2021 of 24 million units (Chart 1) or US$5 billion in sales.” Gartner 2017.

24 mill units gives us plenty of room to capture 200,000 per year and still have only a tiny 0.8% share of the total market. Keep that in mind when considering the possible effects of competition. We can’t get close to even 5% of the market share any time soon so there is no need to fear competitors’ products. Others are needed to fill the market demand.