Can Blinkx (LSE: BLNX) bounce back from this year’s 82% share price decline, or is today’s profit warning is the start of bigger problems?
I’ve taken a closer look in the wake of this morning’s 45% fall, to find out more.
What’s happened?
Blinkx’s share price fell by 45% this morning, after the firm said that its fiscal first-quarter earnings before interest, tax, depreciation and amortisation (EBITDA) are likely to be $5m below management expectations.
The firm said that industry-wide issues of ‘efficiency and effectiveness’, along with the ‘lingering effects of the disparaging blog about the Company’ — a reference to the claims made by Harvard professor Ben Edelman in January — were causing demand to return more slowly than expected.
How bad is it?
Last year, Blinkx reported EBITDA of $39m. Today’s profit warning of a $5m shortfall equates to the loss of more than 50% of last year’s earnings, on an annualised basis.
Of course, as today’s shortfall refers to ‘management expectations’, we can’t be exactly sure how much earnings growth the firm was counting on this year, but it’s probably fair to say that $5m is a significant miss.
Two problems
The first problem, in my view, is that even if Edelman’s claims aren’t proven, they could end up seriously eroding the firm’s earning power through reputational damage. This could be why demand is weak — customers may be choosing alternative services.
The second problem is that Edelman’s claims are nearly impossible for private investors to verify or measure for themselves.
The only thing we have to go on is that as a Harvard Business School professor, Benjamin Edelman has a certain professional credibility, which he probably wouldn’t have risked by making claims he can’t substantiate.
Strong finances
Whatever the problems are at Blinkx, money isn’t one of them. It’s been profitable since 2011 and currently has $126m of net cash, equating to 19p per share.
Thus, if you believe in the business’s long-term prospects, then today’s fall could be a big buying opportunity
Don’t bet the farm on Blinkx
Blinkx has sound finances and could easily bounce back and deliver a strong profit on today’s price, but it could equally fall further: customers could desert the business and any remaining intellectual property could be purchased cheaply by a rival.
In my view, it’s simply too speculative, and I won’t be betting on a Blinkx bounce.
A better alternative?
Blinkx’s valuation looks appealing on current analysts forecasts, but these may be heavily downgraded after today’s profit warning.