Here’s why ThinkSmart shares are up 50%

Earlier this year i thought that British minnow ThinkSmart was a great investment and now it’s up 50% in one day. What happened here to send the company to the moon?

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When I covered ThinkSmart (LSE:TSL) back in June, I said that I thought it was a great British share trading at a massive discount. At the time, TSL shares were trading at 66p each. That gave the Manchester company a total market cap of around £70m.

Unfortunately, I didn’t have the cash to buy it at the time, but anyone who did is likely to be grinning smugly now. A £5,000 investment in June would have netted me £2,500 in clear profit now after the share price jumped on Monday.

So what’s the big news that has seen ThinkSmart shares rocket 50%? It’s actually to do with events far away linked to Square taking over Afterpay

ThinkSmart thinks smart 

First, some background. ThinkSmart’s business doesn’t look great on the face of it. The financial technology firm has posted declining revenues every year since 2016. The amount of money it has made through sales every year has halved in the past five years. 

And CEO Ned Montarello told shareholders in the most recent financial results that the company was making a bold move. It would stop its biggest earning activity to date: renting out electronic equipment to retail customers. 

But an investment in ThinkSmart is effectively a bet on the continued popularity of another company entirely. 

In 2018, TSL sold 90% of its buy now, pay later platform Clearpay to the Australian giant Afterpay. This service allows customers to split their payments for products they buy into monthly instalments. It’s particularly popular among younger consumers, who are used to having an item today and paying it off over time. And this technology development proved a very big earner for ThinkSmart. Especially since it retained 10% of Clearpay. That’s the part of the business that investors are really interested in. Afterpay has grown into a £33bn company. So the bigger Afterpay gets, the more ThinkSmart should be worth. 

In  full-year results to 31 December 2020, TSL’s Clearpay holding was valued at 109.4p per share. At the time, that represented a 40% discount on the ThinkSmart share price. 

Squaring the circle

On 2 August, payments giant Square — the other company run by Twitter CEO Jack Dorsey — announced it was buying out Afterpay. 

That put a rocket under the ThinkSmart share price, sending it shooting up 50% or more in a day. 

Square will pay $29bn for the Australian business. The US firm said it would integrate Clearpay into its suite of financial apps. So every merchant who uses Square will be able to offer a buy now, pay later option at checkout. 

The market cap of the AIM-listed business has shot up to £100m as of 2 August.

Small AIM-listed companies are usually a risky bet. And not all of such investments come to fruition. So I’d never buy AIM shares indiscriminately in the hope that one might get bought out. I could be waiting a very long time for that to happen. 

But by investigating smaller companies with big value propositions — as I suggested ThinkSmart had — I could be on my way to investing riches. And another lesson I’ve taken from this is that I need to keep some cash in reserve for opportunities I think could yield rich rewards in future!

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 considered so you should consider taking independent financial advice.

Tom Rodgers has no current position in the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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