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Koss Corporation (NASDAQ:KOSS) is remains one of the names associated with the so-called “meme stock” craze that has seen some incredible, but very short-lived, short squeezes. If you can time it, you can make some great money, but for the most part, these have been horrible investments. KOSS stock is no exception. Through all this meme craze, KOSS went from being a significantly shorted stock, to one with mild short interest of around 4%. That now eliminates the possibility of a short covering rally driving this stock much higher. The company just reported earnings and we were asked about our current take on the stock. In our opinion, this stock is speculative at best. They are involved in legal settlements with Apple (AAPL), seeing declining sales, and earnings. While the company makes money unlike many current and former “meme stocks”, performance is still too poor to buy the stock here in our opinion.
For those who may be unfamiliar, Koss makes select electronic and sound accessories. They make simple consumer electronics for home and business use. They sell headphones, wireless Bluetooth speakers, computer headsets, noise-canceling headphones, and other wireless-type headphones. Make no mistake, the company is actually making money, as it is earnings positive. Even with the positive earnings, we are still looking at a stock with an FWD p/e that is 70X plus. But the fact that it is making money is a positive.
What surprises us is that with more and more people working from home post-COVID, and with more and more jobs being in the telecommuting world, consumer electronics like this should be selling at a much higher clip. Perhaps the total addressable market will continue to expand, but Koss is being outcompeted which is our opinion given the sales trends. While 2021 vs 2020 certainly saw some tough comps, we did not think that Koss would have some tough comps for 2022 vs 2021.
So just how bad is it? It is not good here. Koss saw sales fall heavily from last year. Its Q4 2022 sales that it just reported hit $4.2 million which is a 22.7% decrease from sales of $5.4 million in the year ago quarter. Now make no mistake, at $8 a share the company is valued at about $75 million, quietly becoming a micro/very small cap stock. These stock declines are justified as sales are falling. Earnings are holding up to a small degree, but it all starts with the top line. For the year the company had $17.6 million in sales. This is a 10% decrease from fiscal 2021 which had $19.55 million in sales. There is one small possible positive in that this consumer tech company now sells at just 4x sales. That is not egregiously valued, but it is not cheap by any means when looking at other valuation metrics.
Now it is not all negative. Earnings held up. Factoring in the margins and operational expenses the company doubled its net income in Q4 relative to last year. Net income was $0.385 million compared to net income of $0.331 million in Q4 last year. That is positive for sure considering the big sales dip. On an EPS basis, there was 33% improvement from $0.03 per share last year to $0.04 per share here in Q4. That was welcomed news for bulls. For the entire fiscal year, the company earned $0.13 per share compared to $0.05 per share a year ago. That is a solid improvement by all accounts, but obviously on an EPS basis, the valuation is sky-high as we saw, despite this growth.
But where do we go from here when the consumer is getting more fickle, input costs are rising, and demand is falling? We think the stock will struggle. Koss is seeing its material costs increasing, and the costs to ship and transport goods are also rising as we know. Further, the company relies on major customers and that is a risk, but the direct to consumer business is doing better. Michael J. Koss Chairman and CEO said in the release:
“While sales are down for the fiscal year, the mix of those sales by channel has allowed for a generous improvement in gross margins as heightened levels of higher margin DTC sales replaced the lower margin sales to a U.S. mass retailer. The delays throughout the supply chain as a result of the persistence of COVID-19 in all parts of the world, coupled with the conflict in Eastern Europe, have continued to affect the Company. The ongoing disruption in ocean freight and congestion at the U.S. ports has resulted in increased shipping costs which are expected to linger and negatively impact gross margins in the foreseeable future.
Now, this is not all bad news, as we like to see higher margin segments growing, but reliance on major customers is a concentration risk. Further, the increased cost of shipping is a big threat and will weigh. On top of that the COVID-19 excuse is pretty weak here in 2022, as most pandemic restrictions are gone. Where it could be in an issues is reliance on China. The company sources a lot of material from China and sends it to their warehouse in Milwaukee.
There are other risks to consider, and the primary one, aside from the increased costs aforementioned is competition. This was highlighted in the recent 10-K. In the stereo headphone market, the company competes directly primarily with approximately six major competitors, and there is no guarantee Koss can outcompete them. In short, there is no moat here.
Further, their sales are concentrated. Over the last two years Koss’ largest customers were Amazon Seller Central and Ingram Micro, respectively. Koss’ sales, as noted in the aforementioned 10-K to Amazon Seller Central “were approximately 13% and 3% of net sales in fiscal year 2022 and 2021, respectively. Ingram Micro sales were approximately 10% and 18% of net sales in fiscal year 2022 and 2021, respectively.” These are sizable customers. In fact, the five largest customers for Koss account for almost half of all revenues. The top five customers were good for “45% of net sales in fiscal year 2022 and 48% in fiscal year 2021.” Any issue with demand from any of these customers could adversely impact revenue tremendously.
On the other hand, the company is growing its direct to consumer business which could be an upside risk. A 72% increase in direct to consumer sales helped to offset some of the decrease in overall revenues. This avenue opens up many smaller potential customers, spreading out concentration risk, while also opening the door for growing revenues should volumes with the largest customers also remain strong.
Operationally, the company has cash to continue, as we learned in the 10-K filing mentioned above. Starting this new fiscal year Koss had $9,208,170 of cash and an available credit facility of $5,000,000. This is more than enough to continue operations for many quarters, especially of the company remains earnings and cash flow positive.
Take home
We like that the company is expanding earnings despite falling sales. However, there is just not much to love here. It is a simple company that makes decent products, but there is a ton of competition. Factoring in rising input costs and lower order volume from a major customer, and we have a problem with sales growth. The direct to consumer business is a saving grace here, but even with all of this news baked in and earnings actually growing, the stock is still very expensive for this moderate growth. While this was once a key “meme stock”, the short interest has shriveled. Overall we do not see much here. We think it is best to avoid the stock.
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