The share price of Martello Technologies (TSXV: MTLO) rallied 175% last week after co-chairman Bruce Linton was ousted from Canopy Growth. Linton was wearing a Martello T-shirt when he appeared on television interviews to explain his departure from the company he founded, and which is now the largest cannabis company in the world. It didn’t take long for investors to realize he would now have more time to focus on Martello.

There is no doubt that Linton has made a name for himself and proved himself a very adept promoter and dealmaker. By getting Martello’s brand on TV, he’s probably already added value to the company. In the long term, building Martello from its current size will require raising capital and making acquisitions, and the company couldn’t ask for a better person than Linton to lead that effort.


The Reality Check

However, building a business also requires a product and a market. So, what exactly is Martello’s product, and how big is its addressable market? Martello provides network performance management solutions to companies. As businesses transition to cloud-based storage and software, there is a growing need for network rationalization. There’s no doubt that there is a market for the service, though it’s already competitive.

Martello went public in September last year when it raised $7.5 million via a private placement. At the time the market was valuing the company at just $21 million. Last week’s rally took the market cap to $75 million, which still makes it very much a microcap. In its 3rd quarter, the company generated quarterly revenue of $3.1 million and reported a small loss. That would put the company on a price to sales ratio of around 6.2 which is not unreasonable for a small, growing tech company.

But, if Martello is going to follow an acquisition-focused growth strategy, the current financials are barely relevant. In recent interviews, Linton said he would like to help the company with its strategy and acquisitions. Martello issued a statement along a similar line. This will mean new capital is likely to be raised along with new shares being issued to pay for acquisitions. Linton is unlikely to have a problem raising capital and making acquisitions given his loyal following in the investor community.


Microcaps Are Always Risky

Trying to rationalize or value the current share price is almost pointless. Investing in Martello at the current price is simply a bet on Linton’s next venture. There is every chance that the current share price could look very cheap in a year or two. But as with any company of Martello’s size, volatility and risk come with the territory. In this case, there may be hidden risks too.

At least 50% of Martello’s share price is now tied to Linton’s reputation – something that can play out both ways. If Canopy’s new management team view any of the company’s goals as unrealistic they will want to manage investor expectations sooner rather than later. There is no reason for a new management team to set themselves up for failure if they believe the vision Linton has been selling is impossible to achieve. That could happen soon, or later when a new, permanent CEO takes over. And, if that happens, investors are likely to question promises being made by Linton with regard to Martello. It could also provide a buying opportunity for anyone wanting to back Linton going forward.

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