2014 has been disastrous for investors in Blinkx (LSE: BLNX). Thats because the share price of the video advertising broker has fallen by a whopping 86% during the course of 2014 and, crucially, it seems as though there is little cause for optimism. After all, Blinkx released a stinging profit warning recently that shows the business is struggling to stay in the black.
Does this mean, though, that the company may fail to survive over the medium term? Or, could such a low share price signal a buying opportunity for risk-seeking investors?
A Lack Of Profitability
As mentioned, Blinkx released a profit warning recently which showed that EBITDA in the first half of the year was zero. This means that, after interest, depreciation and amortisation have been deducted, Blinkxs bottom line was in the red in the first half of the year, which means that guidance for the full-year has been reduced by a significant amount.
Indeed, the scale of the profit warning is perhaps the most surprising part of it. Blinkx was forecast to deliver a pre-tax profit of around 10 million in the current year, which would have been roughly the same as last years level. Therefore, with the first half of the year yielding a loss, it seems highly unlikely that Blinkx will get anywhere near to a pre-tax profit of 10 million for the full-year. Even if the second half of the year improves drastically, a figure that is half this amount would represent a superb turnaround.
While many investors point to the fact that Blinkx has over 70 million in cash and, therefore, can afford to invest in its future and absorb losses for a number of years, the market seems unwilling to give the company the time it needs. Blinkx is no longer a start-up company: it has been profitable for the last four years and, as a result, is unable to fall back to a period of cash burn so as to invest in its future growth. In other words, investors are impatient and Blinkx doesnt seem to have the time to put into action the necessary steps to turn its business around.
Although there is talk of Blinkx folding and returning cash to shareholders, this seems to be an unlikely option. Thats because its almost impossible for management of any company to simply throw in the towel and admit defeat. After all, Blinkx can state that one disappointing first half result does not lead to a defunct business.
So, while Blinkx may not be on the brink of going bust due to its relatively large cash pile and the short term nature of its problems, things could get worse before they get better. With shares having fallen by 86% year-to-date, it may seem as though they cant go any lower but, unless Blinkx can quickly change its fortunes and avoid burning through cash, their value could sink to new lows. As a result, Blinkx may be best avoided for now.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.