A SaaS Value Trap With 200% Profit Growth...
This little rocket ship won't be visiting the moon anytime soon.
Mr Deep-Value also offers separately managed accounts for US-Based, qualified investors.
My favourite film of all time is Interstellar.
In one scene, Cooper tells his daughter that ‘Murphy’s law’ doesn’t mean bad things will happen.
Instead, it means that whatever can happen, will happen.
That slight change in wording makes all the difference.
Instead of worrying about the negatives, you have all possibilities spread out before you like a banquet.
You can figure out how to position yourself to protect against the negatives while also enjoying the positives.
This creates a framework to live by, rather than cowering in fear in the shadow of ‘bad things’.
Imo, this is a much more productive way to operate.
In deep-value, we constantly have to think about all the bad things that can happen, versus all the good things and make a judgement call.
Many people struggle with this ‘judgement call’ part.
They see any uncertainty as ‘bad’, which, of course, precludes them from taking almost every deep-value opportunity.
This is, I believe, why most retail individuals flock to the popular stocks, and make mediocre returns in the long-run.
But, if you understand business, you know that uncertainty is baked into everything, all the time.
It becomes natural to accept risks and figure out how to navigate while maximising opportunity.
Today’s stock perfectly illustrates that intersection between deep-value opportunity and value trap, to be avoided.
It’s also a classic example of exactly what I look for in a business:
Cash-rich, insignificant debt, cash-flowing, decent business model, priced like it was never going to make money again.
It isn’t cheap relative to assets.
This is a pure earnings play, but the pricing, when I first found it, was very attractive:
EV/5Y FCF Ratio = 3.55
P/5Y FCF = 4.2
Those earnings were secured by an operating business I also found appealing:
Recurring B2B subscription revenue, locked in for years at a time.
This is a business I’d love to own in the real-world, and it’s cheap.
Until I read the annual report…
The Business
River Tech (RIVER) is an iGaming SaaS company, based in Malta.
They originally began by acquiring and operating a portfolio of online casinos.
In 2019, they decided to shift gears and sell the entire portfolio to a Cypriot company called Tech4s Limited.
As part of the deal, River Tech, apparently, retained ownership of the core platforms and software, then signed an agreement to be the main software supplier to Tech4s.
This was the first thing that jumped out to me.
It seemed a strange deal, to sell an online casino to someone, but retain ownership of the software.
Surely the software IS the online casino?
On the other hand, I’m no tech-bro, so what do I know?
In any case, the transformation turned River Tech into a cash-flowing, high margin business.
For example, between 2020 and 2024, their growth rates were as follows:
Revenues = +16.4%
Net-Income = +203%
FCF = +441%
RoE = +119%
RoIC = +50%
Exciting.
It kind of looked like a growth stock disguised as a cheap stock, and reminded me of a stock I sold early in 2025.
To complement this, the management team seems rational.
They eliminated all the debt, and started spitting cash at shareholders, via dividends.
In fact, they distributed 86% of earnings in 2024, which is a 94% yield(!) at today’s price.
The Stock Price Decline
When I find a decent business like River Tech, the first thing I do is figure out why the stock price declined.
After all, if the business is growing at such rates, why is everyone running away?
And, there, buried in the annual report, I found it:
“The Group’s revenues are derived from one customer, Tech4S Limited.”
“100% of the Group’s revenues during the year were generated from the provision of software development services to Tech4S Limited.”
“The Group is therefore highly dependent on its relationship with Tech4S Limited and any termination or disruption of this arrangement would have a material adverse effect on the Group’s financial results.”
In other words, if Tech4s pulled the plug, River Tech would have almost zero revenue, going forward.
That’s actually not the worst case scenario, though.
River Tech and Tech4s signed a 3-year contract, guaranteeing the relationship until December 2027.
After fiddling with my big-buttoned calculator, it appears this contract is worth around €30m, during its lifetime.
Today’s market cap is €9m.
The worst case scenario, though, is that Tech4s goes out of business and simply cannot honour the contract with River Tech.
Tech4s seems to be a private company with very little publicly available information, so it's hard to judge the current financial situation.
It was, mostly, for this reason that I didn’t invest.
The risk of River Tech going to zero was staring me too hard in the face.
I’ve invested into companies with disproportionately large clients before, but never anything this extreme.
To me, the drop in stock price seemed justified, but I really did love the idea of River Tech, so I added it to my watch list (to buy later if revenues diversified).
Sure enough, several months later, I awoke to some breaking news and was soon re-watching Interstellar scenes on YouTube.
Tech4s announced the termination of their contract with River Tech.
The stock tanked, obviously. Down almost 70% on the announcement.
They didn’t explain why.
Maybe they just don’t like River Tech anymore, or maybe Tech4s themselves are going out of business.
No one really knows.
The language indicates that Tech4s will honour the contract (assuming they’re not broke), which implies, roughly €20m still available to River Tech from here.
Again, the market cap today is €9m and the enterprise value is just €5.6m.
This, theoretically, gives River Tech two years to figure out how they will continue as a going concern.
As strange as it may seem, this actually makes the River Tech set up more appealing.
The (almost) worst case scenario has actually happened. The stock has (almost) fully priced it in.
Everything is now on the table and we can figure out how to make it all work.
Although, it is curious to me how the stock is still trading above liquidation value (TBV Ratio = 1.5).
There is likely some further downside before a margin of safety exists (imo).
The Investment Case
Here are today’s valuation metrics, in full:
NCAV Ratio = 2
TBV Ratio = 1.5
EV/5Y FCF Ratio = 0.9
P/5Y FCF Ratio = 1.5
It’s certainly cheap and still has two years of ‘normal’ earnings left in the tank. This alone will pay you back today's purchase price.
You could buy the business, milk the rest of the terminated contract and then close it down, suck out the cash, and double your money.
All in a couple of years.
Or, the management team could license the software to someone else and simply replace Tech4s over the next couple of years to keep the party going.
Or, they could segue into a different business and build diversified revenues back up.
This last part has been mooted in the past, with discussions about entering the Reg-tech industry.
This would be a very strong move by the business and position it as something much more credible than online gaming.
Despite this, these discussions haven’t been mentioned much since last year's annual report.
The management team seems aligned with shareholders and willing to at least try to do the right thing.
My favourite part of deep-value investing is that each business contains many people, all beavering away to resolve any issues.
This makes it far more likely that the business will survive and continue in the short term than not.
River Tech, according to its latest report, has 78 employees.
It seems rational that they will come up with some way of continuing to operate, and then continue returning capital to shareholders.
But, for me at least, this isn’t quite that simple.
In The End…
The negatives still outweigh the possible opportunities.
We can’t see the terms of the contract between River Tech and Tech4s, to know whether there really is two years of normal earnings left.
We don’t know if Tech4s is even capable of honouring the remaining two years.
Even if management creates new revenue streams, away from Tech4s, we have no idea about how large those revenues will be.
It’s quite feasible that tomorrow's revenue makes today's valuation look expensive.
Their existing business model has literally been eliminated.
It’s also a realistic possibility that management burns all the cash desperately trying to reinvent the business.
This is not a turn around.
This is a complete reinvention. The two are very different things.
I have previously invested into businesses where the primary revenue sources dried up, but that one had a $2 billion asset to sell, if needed.
River Tech basically has some cash and a few computers.
It’s not quite the same.
Finally, the stock is actually quite difficult to purchase.
I actually did find a small UK brokerage that offers the stock, but it’s not worth the hassle of opening a separate account (to me).
My favourite game is betting that a business will return to normal after the market has priced it for extinction.
Here, ‘normal’ has ceased to exist, which, fundamentally, is why I can’t take the bet, even if there is a lot to love about the set up.
(It’s still on my watchlist though. You never know, and all that.)
This stock is a great illustration of the fine line between opportunity and a risk not worth taking.
Be careful out there.
Mr Deep-Value also offers separately managed accounts for US-Based, qualified investors.