It's tough to pick a set of stocks that will beat the market -- although David Gardner's Rule Breakers and Stock Advisor portfolios both have done so consistently. Nobody's perfect, however, and as he has often said, every portfolio is going to have losers. But here at the Fool, we're serious about the need to acknowledge them and learn from them.
So in this week's Rule Breaker Investing podcast, David will break down his biggest losers of 2015, 2016, and 2017 -- with some help from a few Foolish guests to take some of the sting out of it. In this segment, he's joined by analyst Jim Mueller to talk about Synchronoss Technologies (NASDAQ:SNCR), a company he picked in March 2015, what went wrong for it afterward, and what investors should be watching for in the future.
A full transcript follows the video.
This video was recorded on Jan. 10, 2018.
David Gardner: David's Biggest Losers No. 1: Loser No. 1, this year, and it's appropriate to call it No. 1 because it is my single worst loser. I like to lead off with the worst of all. And my friend, Jim Mueller, had absolutely no responsibility in this stock pick. I mean, this is my stock pick. This is even from a service that Jim doesn't work on, but Jim, you've graciously consented to come in and talk about Synchronoss Technologies. The ticker symbol is SNCR. Jim, how many years have you been at the Fool?
Jim Mueller: I've been here at headquarters for a little over 10 years, but I've been a Fool for about 12 years.
Gardner: Awesome. And what are a few of the things that you do here at the Fool?
Mueller: I've been a longtime analyst for Stock Advisor, covering both your side and Tom's side. And then I was picked by you to be on the team that runs Phoenix 1. Then when Rick Munarriz, you, and the group launched Phoenix 2 and Rick took over that, I moved up to lead portfolio person on that team.
Gardner: That's right.
Mueller: And I also worked on the Options service with Jeff Fischer and Jim Gillies.
Gardner: That's great. So, a motley life, which is true of so many of our employees here at the Fool. Jim, a pleasure to have you join me. Again, you had nothing to do with this stock pick. The actual date was March 25 of 2015, but it was probably a month or two before that I started paying attention to Synchronoss Technologies. I picked the stock at $45.70 that day, just about three years ago, and today as we're taping it's gone from $45.70 to $9.33.
For this podcast this week, we have a simple format for each of these stocks we're going to go over. Two things that went wrong, and then one thing maybe to hope for or to continue to watch. Jim, let's go right at Synchronoss Technologies. A really brief background. What does the company do in a sentence or two?
Mueller: They provide cloud-based services for customers of telecom communications companies like Verizon (NYSE:VZ). It used to be AT&T (NYSE:T), as well. If you have to upload files to the cloud, you're using Synchronoss even though it's Verizon's cloud. And for a long time, they were paid to activate the cell phones, but they've since gotten rid of that since you've recommended it.
Gardner: We'll talk some about pivots. Jim, what is thing-that-went-wrong No. 1 for Synchronoss?
Mueller: Synchronoss this past year has done a lot of self-inflicted damage. They decided to get more into the cloud, and that's good, because the activation service they provided was a flat fee, one-time fee. No recurring revenue. And people had to keep on buying cell phones and activating them for them to grow.
Gardner: So, as you have your new cell phone, you're activating it...
Gardner: ... and Synchronoss is participating in that on the technology side for their telecom partners.
Mueller: Verizon, AT&T, and all those guys. But they also had a cloud business, where they provided the hosting and interaction for people uploading files, videos, pictures, and stuff like that. That's a recurring revenue stream, versus the one-time-only revenue stream that the activation business was.
They decided to go further into that and buy a company called IntraLinks Holdings. The CEO of that, Ronald Hovsepian, would become the CEO of the combined company. He did. And the longtime CEO and founder, Steve Waldis of Synchronoss, stepped back as executive chairman of the board.
But that didn't work out so well. Their revenue growth targets weren't going to be met, so they announced to the market that that's not going to be doable. Then they also had a second problem -- this is the second thing that went wrong -- in that they, at the same time, found out that they had to restate some of their financial statements for 2015 and 2016, and then later on last summer they added 2014 to the mix.
So, two bad things: a bad acquisition with IntraLinks, which they have since sold to a group of investors, Cirrus --
Gardner: And how remarkable is that? They made an acquisition, they took that guy that they acquired as their new CEO, and now, not much more than a year later, they've now sold that company back out and tried to become Synchronoss again.
Mueller: What's more remarkable is that they made a profit on the sale. They bought it for roughly $820 million, and they sold it for right about $1 billion. So good for them on that. So Waldis was back in the CEO position for a while, and then they recently hired Glenn Lurie, who retired from AT&T, and then came on as CEO for Synchronoss, and Steve Waldis has again stepped back to be executive chairman.
Gardner: So those are two things that have clearly gone pretty wrong. We're going to go with one thing to watch going forward. Now, it might be watching hopefully, or it might be watching carefully, but what's one thing to watch for Synchronoss shareholders?
Mueller: They're really going forward with the cloud system. If they can succeed with that and sign up more customers -- beating the telecom companies, offering the cloud system to their own customers -- then that could work out well for the company. But there's a lot of competition in this space. So, hope for it, but it's going to be a tough road for them.
Gardner: What an interesting and sad story, but here we are at less than three years since I made that stock pick, and the company made a big acquisition, because you mentioned they sold back IntraLinks for about $1 billion. The market capitalization, the value of Synchronoss as a company today, is only about a half-billion. So they bit off a huge thing, more than they could chew, tried to change their business, then sold that off, as you mentioned, at a profit, and they're just seemingly trying to return to the company that they were before.
Mueller: Well, they are at a half-billion now. Back when they made the acquisition they were about at $2 billion.
Gardner: Yeah, don't remind me.
Mueller: That was about 75% ago.
Gardner: Well, when a stock drops 80%, which is how much Synchronoss has dropped since I picked it in March 2015, that market cap is going to come down quite a bit, isn't it?
Gardner: All right, Jim. Thank you very much for pinch-hitting. We're a little short-handed just a week into the new year, so you came over and graciously talked about a Rule Breaker, even though you're not working on our Rule Breakers service. Thank you, Jim!
Mueller: I was glad to do it, David.