It doesn’t take an investment guru to realise that Monitise (LSE: MONI) stock is still overvalued in spite of a 33.7% drop since last week. The UK payment company has a market cap of about half a billion pounds, yet it is worth much less than that based on the value of its assets — roughly 60% of which are represented by goodwill and intangibles.Â
Its P&L and cash flow statements also point to possible downside, particularly if Monitise management don’t deliver. Executives have recently confirmed guidance, but the news that Visa (NYSE: V.US) — their most important partner — is considering strategic options with regard to its remaining 5.5% stake in the company dealt a blow to shareholders last week.Â
Cash Is King
In the last 52 weeks of trading, Monitise stock has been valued between 26.2p and 82.7p, and it currently trades at 29.2p — or 12% above the 52-week low of 26.2p it recorded last week. The stock price is highly volatile as shareholders are exposed to several risks, including dilution risk. As competition intensifies, larger rivals pose a serious threat to its business model, too.Â
Monitise said last week that it ended the fiscal year 2014 with a strong balance sheet, given that its net cash position stood at £146m. That compares with a net cash position of £66.2m as at 31 December 2013 and £85.6m as at 30 June 2013.
It net cash position, however, has materially improved following a cash injection of £105.6m in the last 12 months. Equity funding totalled £117.3m in fiscal 2013. This is not good news. In fact, it looks like Monitise may struggle to grow as a cash-generative and profitable entity over time. Based on the value of its current assets, Monitise is worth less than half its market cap.
Cash Flow
As capital spending grows, the spotlight is on Monetise’s cash flow generation. Earnings before interest, taxes, depreciation and amortisation — a good proxy for operating cash flow — came in at -£19.3m and -£31.4m in 2013 and 2014, respectively, according to the company’s financial statements. A negative free cash flow of about £60m for 2014 (the comparable figure was -£35.9m in 2013) means that Monetise is burning £175k a day. Â
Economic losses were £32.8m and £43.7m in 2013 and 2014, respectively. Revenues came in at £95m in 2014, but the speed at which revenues are growing (+32% year-on-year) leaves more questions than answers at this points in time, and is well below trend. Â
Takeover Potential?Â
“On 27 August 2014, the group entered into an alliance with IBM to combine the best of both companies’ mobile banking, payments and commerce technology,” Monitise said when it announced its full-year results on 15 September.
“As part of the collaboration, IBM’s global go-to-market investment of dedicated resources and promotional initiatives will pair with the group’s staff to pursue Mobile Money opportunities,” Monitise added.
A takeover by IBM is just what shareholders would need.