Shares in Monitise (LSE: MONI) (NASDAQOTH: MONIF.US) have fallen heavily this week after the mobile payments solutions provider released a disappointing trading update. In fact, they have dropped by a whopping 36% in the space of just a few days and are now trading at their lowest point in over five years.
So could this be the perfect time to buy? Or, should you avoid Monitise, even at this relatively low price?
Revenue Warning
The reason for this week’s disastrous share price performance from Monitise is a trading update that lowered guidance for the next couple of years.
For example, Monitise now expects full-year revenue to be below its previous expectations, with this translating into an EBITDA loss of between $60m and $76m, which is wider than market estimates and significantly worse than previous guidance of a loss of $33m. This is the third profit warning in the last year and has led to Monitise’s share price declining by an incredible 82% over the last twelve months.
Up For Sale
The reduced profitability is being blamed on a transition to a subscription-based business model and, as a result, Monitise is reviewing its strategic options.
To the layman, this essentially means that Monitise is considering whether a sale would be in the best interest of shareholders, although it still expects to be profitable (on an EBITDA basis) next year. Clearly, IBM or one of Monitise’s other partners or customers (such as MasterCard) are likely to be in the frame as potential bidders, but with the challenges it is currently facing there is no guarantee that a viable bidder will be found.
That’s a key reason why shares have fallen so heavily since the announcement — the market appears to believe that no bidder will be found, hence the company’s severe decline in valuation in recent days.
Looking Ahead
Clearly, Monitise has an excellent product but, as with many great ideas, it is proving to be a major challenge to find a way of making it profitable. Certainly Monitise occupies a niche that will enjoy superb growth in future years, as people use mobile payments solutions to an even greater extent than at the present time.
However, with its transitional period being much deeper and taking far longer than expected, things could get worse before they get better for Monitise. And, while its product is appealing, its business is less so, which means that a bidder may not be forthcoming.
As such, investing in Monitise does not seem to be a sound move at the present time.