Ever heard of InternetQ (LSE: INTQ)? Before today I confess I’d come across the name but wasn’t too familiar with it. But seeing a 60% price crash this morning to 55p made me sit up and take note — as of close on Wednesday the company had a market capitalisation of £54m, but by noon Thursday it was valued at just £22.5m.
If you’ve been a holder since the shares’ peak in late February 2014, you’ll be sitting on an 86% loss today! But who is InternetQ, what does it do, and why the fall?
Mobile software
InternetQ is a software development company based in Greece, doing “marketing and digital entertainment” for mobile networks, and today it released a response to the adverse share price movement. The collapse, it tells us, is due to allegations made in a blog post which the company claims are inaccurate. So who is the blogger and what do they say?
It turns out it’s ace bear-catcher Tom Winnifrith, he who helped expose the problems at Quindell (now Watchstone Group) and Globo. In his latest at ShareProphets, Tom has been been taking a close look at InternetQ’s accounts — and he doesn’t like what he sees.
InternetQ has been reporting impressive annual growth for the past few years, but at the same time it has been raising cash though new equity issues and expanding through acquisition — the most recent was in 2013, a year in which the company reported a 25% rise in EPS (after a 100% reported rise the previous year). Borrowings have been growing too, and the firm reported €18.5 million of bank debt at its interim stage this year — a period in which adjusted EBITDA was reported to have risen by 34%, although cash flow declined by 6%.
One thing the firm has been doing, which Mr W picks up on, is capitalizing a lot of its operating expenditure as software development. That means that instead of going down as a simple cost and just reducing headline profit, the expenditure finds its way onto the books as intangible assets — and Tom estimates that reporting it as conventional ongoing expenses would knock around 50% off 2014’s reported EBITDA.
Trade receivables have been growing too, which is rarely a good sign.
Super low P/E
So what do we do now? InternetQ’s fundamentals look impressive — the shares are trading on a forward P/E for this year of just 4.7, and that drops to only 3.6 based on 2016 forecasts. And EPS growth forecasts put the PEG ratio at just 0.2 and dropping to 0.1 (where growth investors typically see around 0.7 or less as being good).
But there only appears to be one broker issuing recommendations, and that’s InternetQ’s own broker and adviser Canaccord Genuity — perhaps unsurprisingly, they rate the stock as a Buy, and have a price target of 528p on the shares — nearly ten times the current price!
Other things being equal, a very low P/E like this could indicate a stunning bargain. But it can also mean that institutional investors are keeping well away for very good reasons. And in my experience, Mr Winnifrith is pretty good at spotting those reasons.
It’s bargepole time for me.
