I will admit that at the beginning of this year, I didnt know much aboutMonitise(LSE: MONI). I thought the company was yet another over-hyped and over-priced story stock with no potential. However, after covering the company several times, Im beginning to turn positive.
You see, while it is true that Monitise has disappointed over the past few years, missing targets andburningthrough cash, the company does have some real potential.
And as Ive mentioned in an earlier article, Visa took more than five decades to becomethe global payment processing behemoth it is today. So patience is a virtue with Monitise. Thecompanyiscertainlya long-term buy and hold investment.
The main reason why Monitise is set to succeed, is the fact that the company has a number of wealthy backers, with deep pockets and global platforms from which Monitise can grow from.
For example,IBMprovides technologyservices for many of the worlds largest financial institutions. Monitises recent deal with IBMwill help the company accessthese financial institutions and with 20% of Monitises staff heading over to IBM, Monitise will be able to benefit from IBMs experience.
And IBM is not Monitises only global partner. The mobile money company also counts Visa,MasterCard,Lloyds,RBS,BlackberryandSamsungas partners.
Difficult to value
Even though Monitises prospects are bright and the company has plenty of wealthy backers, Im not convinced.
As Monitise is not profitable, the company is extremely hard to value, therefore its not possible to invest with a margin of safety. With this in mind, unless Monitises market cap. falls below the groups cash balance then Im staying away, until the company is able to consistently turn a profit.
When is this likely? Well, Monitises own forecasts indicate that the company will be profitable on an earningsbefore exceptional items, depreciation, amortisation, impairments and share-based payment charges basis by 2016.
Current City forecasts are predicting that Monitise will report EBITDA of 7m during 2016, followed by EBITDA of 61m during 2017. Analysts expect the company to report a net profit of 17m during 2017, with 1.97bn shares in issue, this works out as around 0.9p per share.
So, at present levels Monitise is trading at a 2017 P/E of 36.7, an extremely rich valuation.
However, using an alternative valuation method, enterprise value to EBITDA, Monitise looks cheap compared to larger peer Visa. In particular, at present Visa trades at a 2017 EV/EBITDAmultiple of 14, while Monitise trades at a lowly EV/EBITDA multiple of 8.4.
Still, a lot can happen over the next two years, so these valuations should only be used as rough estimates.
The bottom line
Monitisehas the potential to revolutionise the mobile payments industry, although Im not in any rush to buy in.
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Rupert Hargreaves 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.