If the bears are right,it is soon going to be game over for Monitise(LSE: MONI) shareholders.It doesnt look good, but this could be the perfect time to buy into the stock, the bulls argue.Frankly, if I were to take any risk in the digital world, Playtech(LSE: PTEC) would be my call.
Monitise
The Bulls View
The company will start to generate profits before it runs out of cash. Its net cash position is going to rise as it continues to secure new contracts, while itsclients portfolio continues to grow. The stock is in bargain territory as it trades 80% below the level it recorded one year ago, and is down more than 50% in 2015. The tide is turning, the bulls insist and if things become problematic, IBM will come to the rescue.
The Bears View
News such as the latest deal with Frances Societe Generaleare encouraging, but the French leader mainly chose to go with IBM, Monitises co-partner in the project, while Monitise played a minor role. Moreover, Monitise doesnt have any unique selling point and doesnt have the resources to continue to operate on its own, the bears argue. At 2x revenues its stock seems incredibly expensive, also based on the fact that Monitise is not expected to generate Ebit and income for some time, so multiples arent helpful when it comes to gauging its relative valuation.
Playtech
The Bulls View
This weekPlaytech decided to put forward an offer to acquire Plus500, thetroubled contract-for-difference (CFD) companythat came under a huge amount of pressure in recent weeks due to its anti-money laundering procedures. If it goes through, Playtechs opportunistic 460m move would allow theIsrael-based/London-listed groupto strengthen its presence in the CFD world: management has proved to be pretty damn good at delivering value viadeal-makingover the years, so this time may not be any different. Upside could be as much as 30%, according to top-end estimates from some analysts, although the average price target from brokers isnt far away from Playtechs current valuation of 833p a share.
The Bears View
As is often the case withsimilar deals, its hard toquantify the regulatory risksurroundingthe acquisition of Plus500, but its very possible thatPlaytech wont be very pleased with the findings following a proper round of due diligence. A Playtech investment, the bears point out, could be extremely volatile even at best of times, as its share price shows, while accounting practices in the sector heighten the risk associated to most stocks. Sell is the obvious recommendation here, they conclude.
My Take
Personally, Id avoid Monitise, although brave and opportunistic investors may do well to invest in it at around 10p a share. Value is another matter, however, Id argue. The stock is up almost 5% today for no apparent reason.
With amarket cap of 3.4bn, Playtech is a much bigger and more solid entity than Monitise. Even thoughthere are obvious risks embedded in its strategy as well as in the sector where it operates, trading multiples at 16x and 12x for 2016 net earnings and 2016 adjusted operating cash flow, respectively are reasonable for such an asset-light business, which is growing fast and also offers a projected yield north of 2%. Moreover, losses of clients at Plus500 could be contained.
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Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK owns shares of Monitise. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
