Is Monitise Plc Still A Buy?

monitiseMonitise (LSE: MONI) shares plunged 16% this morning, after the firm reported that revenue growth is expected to miss expectations this year, due to the firm’s transition to a new payment model.

If you’re a shareholder, should you be worried? Should you even be surprised? In my view, the answer to both of these question is no, as I’ll explain.

What’s happening?

Earlier this year, Monitise announced a dramatic shift in its business model, from a licence-based model, requiring upfront payment, to a subscription-based model, where payment is spread evenly over the lifetime of a customer relationship.

Obviously, this means that near-term revenue will drop — and today’s update suggests that the fall has been bigger than expected, with Monitise forecasting full-year revenue growth of 31%-33% in 2014, down from consensus forecasts of 40%.

However, Monitise has maintained its medium-term outlook for revenue growth of at least 25% in 2015, and still expects to turn a profit in 2016.

Is it good news?

I think that Monitise’s move to a subscription-based business model was very smart. In the medium term, it should provide stable, rising cash flow.

In my view, it’s a sign that Monitise is growing up, and that the firm’s management is positioning the business to be able to fund its own capex and, potentially, fund regular shareholder returns.

Despite today’s stumble, this plan strengthens my positive view on Monitise’s long-term prospects.

Is now a good time to buy?

Valuing a growth stock is always difficult, especially when the company concerned has never turned a profit.

However, Monitise has a number of partnerships with big-name financial companies, such as MasterCard, and has a clear plan for growth that makes sense to me.

Revenue is expected to rise from around £100m this year to £500m in 2018, as user growth continues, and the firm is targeting an EBITDA (earnings before interest, tax, depreciation and amortisation) margin of ‘at least 30%’ by 2018.

In my view, investors in Monitise have reached a turning point: early stage investors who spotted the stock five years ago are sitting on gains of nearly 500%. These investors may want to cash out, as the next few years could contain further ups and downs.

However, I reckon that newer investors should treat today’s slide as a buying opportunity — in my view, anything close to 40p should make a good long-term buy.

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Roland does not own shares in any of the companies mentioned in this article. The Motley Fool owns shares of Monitise.