The share-price fall at Blinkx (LSE: BLNX) has found a bottom at least for now.
The internet media platform provider revealed a half-year balance sheet carrying about 28p per share in net cash, roughly the same as todays share price, so its no surprise that attention turns to upside recovery potential.
Is the worst over?
In November, the directors said they think the worst is behind Blinkx and that, since July, month-on-month growth suggests trading has reached an inflection point. They expect mobile-related sales to contribute approximately 20% of revenues during the current trading period.
However, lets remember that the recent half-year report brought news of a mammoth profit collapse, and revenue generation slowed considerably during the period, amplifying the effects of seasonally slower summer months. Its tempting to look at the firms trading record and assume that past glories can be re-achieved on profits. However, I can think of at least three reasons to be cautious:
1) Poor operational and strategic visibility
Blinkxs business is unlike that, say, of a biscuit factory. I can understand how a biscuit factory can grow its revenues and profits. I can see the market and research the biscuit-eating trends of the public.
Blinkx is different. Blinkx is like a black box to me. Revenues, cash flows and profits come out, or not, but Ive very little idea of how the firm generates them from within that box. Ive no idea about the dynamics of the industry in which Blinkx participates as well. Maybe you have, but I havent, and that makes investment decisions uninformed from my perspective.
2) Sector volatility
Its clear from Blinkxs dramatic and sudden profit collapse that the firm operates in a very fast- changing industry. What works one day apparently fails to work the next, so firms such as Blinkx must adapt and change at speed. Thats a hairy commercial set-up that must be easy to misjudge. The consequences of misjudgement could be catastrophic for the firm and its investors.
3) Poor economic franchise
The best businesses command a robust economic franchise that keeps earnings and cash flow pumping. Maybe its a unique selling point, or market domination, or some other quality that translates into profitable demand for the firms goods and services, and keeps customers coming back for more.
Thats not Blinkx. Blinkx had the rug pulled from its business model seemingly over ight and now it scrabbles to migrate to mobile, an alternative mode of business. Is Blinkx a commodity-style business, a business with no unique advantage over its competitors? If so, perhaps the kind of business volatility weve seen recently at Blinkx may become a recurring theme. Perhaps the economics of the sector will change again, or maybe a switch to mobile-generated business will be less profitable than the directors expect.
Whichever way we look at it chasing the market around as it shifts to try to eek out a profit is not present as a robust strategy.
A year ago, Blinkx delivered post-tax profits in excess of $10 million; the recent six-month period produced a loss of almost $10 million that mammoth $20 million differential occurred over just 12short months. Thats why the share price dived from 220p or so at the start of 2014 to under 30p today.
Its tempting to bet on Blinkx reversing that trick as it builds a new business led by mobile-driven applications. Who knows where the share price may take if that comes off. That said, Blinkx today is the very definition of a punt, I reckon, so long-term-buy-and-holders should look away now!
Opportunity abounds on the London stock market, but going into high-risk situations such as Blinkx now may not be the best way to preserve capital. I’m trying to protect the downside first and one way of doing that is to think differently from other investors. A special Motley Fool wealth report discusses that point as one of Ten Steps To Making A Million In The Market. This useful paper is available free of charge and without obligation for a short time longer. To download a copy, click here.
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