I will admit that at the beginning of this year, I didn’t know much about Monitise (LSE: MONI). I thought the company was yet another over-hyped and over-priced story stock with no potential. However, after covering the company several times, I’m beginning to turn positive.
You see, while it is true that Monitise has disappointed over the past few years, missing targets and burning through cash, the company does have some real potential.
And as I’ve mentioned in an earlier article, Visa took more than five decades to become the global payment processing behemoth it is today. So patience is a virtue with Monitise. The company is certainly a long-term buy and hold investment.
Wealthy supporters
The main reason why Monitise is set to succeed, is the fact that the company has a number of wealthy backers, with deep pockets and global platforms from which Monitise can grow from.
For example, IBM provides technology services for many of the world’s largest financial institutions. Monitise’s recent deal with IBM will help the company access these financial institutions and with 20% of Monitise’s staff heading over to IBM, Monitise will be able to benefit from IBM’s experience.
And IBM is not Monitise’s only global partner. The mobile money company also counts Visa, MasterCard, Lloyds, RBS, Blackberry and Samsung as partners.
Difficult to value
Even though Monitise’s prospects are bright and the company has plenty of wealthy backers, I’m not convinced.
As Monitise is not profitable, the company is extremely hard to value, therefore it’s not possible to invest with a margin of safety. With this in mind, unless Monitise’s market cap. falls below the group’s cash balance then I’m staying away, until the company is able to consistently turn a profit.
When is this likely? Well, Monitise’s own forecasts indicate that the company will be profitable on an earnings before exceptional items, depreciation, amortisation, impairments and share-based payment charges basis by 2016.
Current City forecasts are predicting that Monitise will report EBITDA of £7m during 2016, followed by EBITDA of £61m during 2017. Analysts expect the company to report a net profit of £17m during 2017, with 1.97bn shares in issue, this works out as around 0.9p per share.
So, at present levels Monitise is trading at a 2017 P/E of 36.7, an extremely rich valuation.
However, using an alternative valuation method, enterprise value to EBITDA, Monitise looks cheap compared to larger peer Visa. In particular, at present Visa trades at a 2017 EV/EBITDA multiple of 14, while Monitise trades at a lowly EV/EBITDA multiple of 8.4.
Still, a lot can happen over the next two years, so these valuations should only be used as rough estimates.
The bottom line
Monitise has the potential to revolutionise the mobile payments industry, although I’m not in any rush to buy in.