Are Vodafone Group plc and Bango plc poised to deliver big gains for investors?

Should you buy Bango plc (LON:BGO) after today’s news or play safe with Vodafone Group plc (LON:VOD)?

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Shares in mobile billing firm Bango (LSE: BGO) rocketed as much as 20% today after the firm announced a potentially significant acquisition.

Bango has paid £2.4m in cash and shares to acquire BilltoMobile, a US service that provides carrier billing similar to that offered by Bango. BilltoMobile has relationships with all four of the major US mobile network operators, and processed £55m of annual billing last year.

Carrier billing means that customers can make purchases online and have them charged to their mobile bill. Bango believes this is an area with a lot of growth potential. The only problem is that neither Bango nor BilltoMobile actually makes any money at the moment. Bango reported a post-tax loss of £4.8m on turnover of £3.2m last year; BilltoMobile made a loss of £590,000 last year.

Operating costs should stay flat

Bango says that it can handle all of BilltoMobile’s current billing through its existing infrastructure, so operating costs should stay flat despite the firm handling a higher level of processing. Bango expects BilltoMobile to make “a significant contribution” to Bango’s performance, but stopped short of saying that the deal would enable Bango to make a profit.

On that basis, it’s fair to assume that Bango will remain lossmaking for the foreseeable future. Indeed, despite Bango’s optimistic projections for billing growth, the firm’s own house broker expects a loss of £5.3m for 2016 and £4.1m in 2017.

The figures may improve slightly following this acquisition, but I’m not sure this will be enough. Bango’s net cash balance was £12.1m at the end of last year. Today’s acquisition takes it down below £10m. Cash outflows for the last two years have been about £4.2m per year. If this performance continues, Bango could be out of cash by the end of 2017.

In my view, today’s gains are more of a selling opportunity than a ‘buy’ signal.

The market trusts this dividend

In contrast to struggling Bango, mobile giant Vodafone Group (LSE: VOD) is profitable and is expected to report rising profits this year.

Indeed, City analysts recently increased their earnings forecasts for Vodafone for the first time in almost a year. Vodafone’s Project Spring investment programme is now coming to an end, and there are early signs of recovery in some of the group’s major European markets.

Vodafone has kept investors happy by holding its dividend at 11.3p over the last couple of years, despite not being able to cover the payout with earnings. It now looks like the combined effect of falling spending and rising sales could provide a big boost to its profits over the next couple of years.

What’s interesting is that the market hasn’t really questioned this approach. Vodafone shares currently yield 5.2% and trade on a 2016/17 forecast P/E of 38. In my view these figures suggest that the firm’s biggest investors are confident that profits will rebound strongly before Vodafone is forced to cut its dividend payout.

As a Vodafone shareholder myself, I hope that’s correct. In all honesty I’m not certain, but I’m willing to trust the group’s ability to make steady progress and continue to enjoy the dividend yield until something concrete changes.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head owns shares of Vodafone Group. 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.

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