Few investors must be as frustrated as those in Blinkx (LSE: BLNX) right now. Shares in the video search and advertising company have fallen by an incredible 82% since the turn of the year, which is a hugely disappointing performance for a company that undoubtedly has significant long-term potential.
However, things could get worse before they get better for Blinkx and shares in the company could have further to fall. Heres why.
When it comes to technology and software companies, investors want potential. Certainly, Blinkx has a significant amount of long-term potential and video search and advertising could prove to be a major growth area in the coming years.
However, now that the company is no longer in its start-up phase, investors need to see profit growth before they will rerate the share price upwards. In other words, early-stage investors were comfortable in having a vision of where Blinkx could be in a number of years time. Todays investors simply want to see the bottom line grow at a rapid rate.
Thats where Blinkx looks set to disappoint on a vast scale. Earnings per share (EPS) are forecast to fall by 27% in the current year and by a further 24% next year. After last years disappointing growth of just 1%, this means that Blinkx is due to have three very disappointing years in a row.
Indeed, EPS is set to be just 26% higher in 2015 than it was in 2011 and, as a result, it is more likely than not that the market will continue to rerate shares in the company downwards. After all, Blinkx is not increasing its bottom line, so why would investors bid up its shares in the short run?
As mentioned, Blinkx continues to offer long term growth potential. However, the market seems to be focused on a much shorter timeframe and, as a result, it appears unlikely that the share price will move upwards until evidence of a change in the companys bottom line becomes obvious.
With shares in Blinkx trading on a price to earnings (P/E) ratio of 16 times next years earnings, there seem to be better options within the software sector. Due to this, shares in Blinkx may have to fall further before they become worthy of purchase.
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Peter Stephens does not own shares in Blinkx