Is Monitise Plc Really Worth Half What It Was In 2013?

Shares of Monitise (LSE: MONI) have collapsed this year after some disappointing results and the termination of a major partnership with Visa (NYSE: V.US).  However, I don’t believe that Monitise is worth only half what it was last year. This looks like a fantastic buying opportunity.  

For those of you unfamiliar with Monitise, it provides software and services that allow businesses and their consumers to “bank anywhere, pay anyone and buy anything on their mobile devices”

Basically, Monitise builds infrastructure that provides the backbone and systems necessary to enable mobile banking and commerce.

Vanishing Visa

The Visa partnership was invaluable as Monitise grew from a fledgling company with a paltry £3.7m in revenue in 2009, to a sizeable operation that brought in £95m in revenues last year.

Analyst estimates point to roughly 15% of the company’s revenue being generated through the Visa partnership. Therefore the 30% fall in share price that followed the news seems attributable to the loss of potential that people expected the partnership to deliver in the future.

While it is true Monitise might not be where it is today without the partnership, it now boasts the likes of Santander, Telefónica and Mastercard as partners who are all likely to facilitate further business for the company.

Furthermore, in August the company announced a deal with IBM that should give them access to IBM’s customers, including a myriad of global blue-chip companies that could benefit from mobile payment services. IBM provides services to 90% of the top 60 banks in the world, and so this opportunity could be massive.

Basically, Visa paved the way for Monitise, but now it has a proven customer base the partnership does not seem as necessary to me.

Pain Now For A Brighter Future  

Monitise has vowed to be profitable by 2016, and so when the company reported a large loss of £60m (£51m last year) investors ran for the hills. In investing it is so important to distinguish why a company made a loss before selling, and in this instance it is largely attributable to an increase in operating costs.

On the face of it, this sounds worrying. After all, if operating costs scale with revenue growth, then the firm will never make a penny. But business simply doesn’t work like that. The company grew 31% last year and predicts similar revenue growth next year. 

With such incredible growth rates, it makes sense to ensure your systems and staff are in place to provide an exceptional service and to cope with a possible further 30% or more growth next year and possibly the year after that. After all, no matter how many clients want to use Monitise, if they don’t have the capacity to fulfil orders then it counts for absolutely zip.

The company is actually very clear on their expectations for OPEX in the future, stating: “We expect cost growth half-on-half to slow and plateau in the new few reporting periods.”

As you can imagine, it wont take long before that 30% revenue increase overtakes plateaued operating costs. Management also give good reasons for the current increase: they are “investing globally ahead of the growing opportunities in the mobile market.”

And what opportunities! There will be 1.75bn mobile banking users in the world by 2019 and this does not even include many countries where smartphones are not yet, but eventually will be, widespread.

Bearish Beliefs

However, it would be remiss of me not to mention a few worries the market has about this growth story. Firstly, the group has continued to raise capital to keep it afloat through its loss-making years and as a result has diluted the holdings of shareholders. There are now 1.9bn shares outstanding, compared to 340m in 2009, a significant increase. This could look insignificant in hindsight if the business succeeds, but this can be a warning sign. On the plus side, the company is cash rich with £146m in cash and no long-term debt.  

Secondly, critics have questioned whether Monitise has a “moat” or not. What’s to stop companies constructing their own mobile payment arm?

I disagree with these attacks. I doubt so many institutions would have signed up for Monitise’ offering if it was so easy to create such a system in-house. However, the real benefit of Monitise is its worldwide network. It is in 170 countries and its land-grab tactics have seen it build up the largest scale network of its kind in the world with a prestigious range of partners that can drive revenue growth for each other.

In the tech space, it is often the case that a market leader’s dominance increases at an ever-greater rate as their scale affords them better reputation and advantages over the competition. The strategic partnerships that Monitise are already able to offer their customers are unparalleled and this should grow as they do. It is a virtuous cycle that I believe could carry them far.

Therefore, I believe a small investment into Monitise could yield big returns in the long run if investors can weather the inevitable choppy waters as the market makes its mind up about this growth story.