The fairvalue ofBlinkx(LSE: BLNX) hinges on its merger and acquisition (M&A) strategy. There are reasons to believe the online advertising group could surprise investors in the next few quarters, particularly if itcontinues to grow inorganically (for instance, by acquiring assets). If you are keen to add Blinkx to your portfolio, do not forget this is a highly speculative bet and you may walk away empty-handed if things do not go according to plans.
With low capex requirements, part of its gross cash pile could be deployed to mop up smaller players in the next 24 months or so.
Essentially, Blinkx could acquire earnings of targeted assets, while diversifying its asset base away from its struggling desktop business. A strategic U-turn is on the cards and appears inevitable, given that mobile is the fastest growing segment in online advertising.
Blinkx agreed to acquire AdKarma in December, for an initial consideration of $15 million in cash, and an additional $5 million in cash or stock, payable by December 2015. It spent $20m to secure about 1.7m in net earnings. Blinkx said it was encouraged by AdKarmas high-growth mobile business.
Assuming Blinkx spends most of its gross cash pile for bolt-on acquisitions in the next couple of years which is very likely, based on its track record inM&A it could add between 5m and 10m of net earnings to its bottom line,which would come on top of 8m of net income that some analysts have pencilled in for the period, for a lowly implied forward p/e ratio of up to 4x, assuming a constant share price and shares outstanding.
Value & Risk
Blinkx is surely in restructuring mode. The net cash-adjusted value of its shares is just 23% the value of its total sales. Blinkx has been hammered in the last couple of years, but most analysts covering the stock believe that Blinkx could be worth at least twice as much as its current value. I think such a view is not insane, but carries big risks.
Its hard to gauge the fair value of Blinkx based on trading multiples: Blinkxs dreadful performance in recent times doesnt help, and forecasts are not reliable, either. But for investors willing to embrace risk, one key financial metric to keep on the radar is operating cash flow, which is where Blinkxs strength may reside.
Blinkx must invest to bulk up in the right places away from desktop, of course and its balance sheet is over-capitalised, which is a good thing. Based on the value of its assets, I would feel comfortable adding Blinkx to my holdings at a price in the 25p-45p range, but I would not expect my investment to yield dividends for at least a year or so, although this is an opportunistic trade, so I would certainly be seeking short-term gains.
That said, in all honesty, for the same level of risk, I urge you to learn more about a 200m engineering companybased in the UK,whose shares have surged 15% in the last four weeks of trading and seem to be on a roll. The name of this company, which is also a takeover target, is included in a stock & investment report that could help you deliver a performance of 20% a year!
This research has been produced by our Fool Team, and is completely free for a limited amount of time. It comes without further obligations, so click here right away!
Get FREE Issues of The Motley Fool Collective
Get straightforward advice on whats really happening with the stock markets, direct to your inbox. Help yourself with our FREE email newsletter designed to help you protect and grow your portfolio wealth.
By providing your email address, you consent to receiving further information on our goods and services and those of our business partners. To opt-out of receiving this information click here. All information provided is governed by our Privacy Statement.