Shares in Blinkx (LSE: BLNX) have made a stunning start to 2015, surging 52% since the turn of the year. But much of this gain is as a result of improving investor sentiment rather than any cold, hard facts regarding improved financial performance.
For example, Blinkx remains a loss-making company and, while it is expected to break-even in the current year and deliver a pretax profit next year, it remains in the midst of a transitional period that is undoubtedly proving highly challenging for its finances and for its investors.
However, with a sound balance sheet and plenty of cash, Blinkx is on the front foot. It is intent on making multiple acquisitions so as to quicken its rate of change towards faster growing markets.
And, with a renewed strategy that has included unifying its brand advertising trade entities under one banner — RhythmOne — it seems to be doing all of the right things to return to profitability and provide its investors with an improved earnings profile over the medium to long term.
While Blinkx could see its share price become rather volatile next week, with the release of its results likely to move its share price in either direction in the short run, its longer term prospects remain sound.
Of course, it is not the only appealing stock in the software and computer services sector, with larger peer, Micro Focus (LSE: MCRO) offering a very enticing investment case.
For example, Micro Focus is a hugely profitable business and, over the next two years, is expected to increase its bottom line by 21% and 8% respectively. When combined with its price to earnings (P/E) ratio of 14.3, this equates to a price to earnings growth (PEG) ratio of just 0.7, which indicates that Micro Focus offers growth at a very reasonable price.
However, the same does not appear to be true of Aveva (LSE: AVV) and Sage (LSE: SGE). Certainly, they both have excellent track records of profitability and have posted average increases in earnings of 8.4% and 6.6% respectively in the last five years. As a result, they come with far less risk than Blinkx.
However, they lack value at their current share prices, with Aveva trading on a PEG ratio of 2.3 and Sage having a PEG ratio of 2.9. Both of these numbers indicate that the 40% and 15% share price gains made already this year make future capital gains somewhat limited.
So, while Blinkx does have significant long term turnaround potential, Micro Focus appears to be a better buy. It is much more stable, has bright future prospects and trades on a very appealing valuation.
That’s not to say, though, that Blinkx should be avoided — it appears to be turning its fortunes around and could prove to be an excellent long term buy — one with more risk, but more potential reward, than sector peers Aveva and Sage.