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A 70% Upside For Blinkx plc

In the last 52 weeks of trading, Blinkx (LSE: BLNX) shares have been valued between 27p and 234p. They currently trade at 37p, and they are fairly valued based on the company’s assets base. Still, opportunistic trades at this level ought to be considered.

Investment Profile

I would recommend hedging any long position in Blinkx shares. 

Blinkx, an online video advertising business, is neither a bargain nor a safe bet on the stock market. In fact, this is a very risky equity investment. A wise strategy would be to add Blinkx shares to a diversified portfolio skewed towards equity investments with a lower beta.

Volatility

If volatility (VIX) spikes above 20 — which is a distinct possibility over the next eight weeks of trading — Blinkx shares will come under pressure. And if the VIX index remains low, Blinkx will be still exposed to the headline risk surrounding both its business model and earnings forecasts.

Stock buyback rumours have emerged in the last 48 hours. The shares were up almost 10% around mid-day on Wednesday. However, a lack of “catalysts”, as analysts call key events that positively impact equity valuations, is apparent. You’d have wanted to be a fly on the wall at Blinkx’s annual general meeting for shareholders, which was due on Tuesday 15 July.

Performance

Blinkx is in dire straits. Its one-month performance reads -42%; its three-month performance reads -57%; its six-month performance reads -82%. Ouch. 

Blinkx’s problems started to mount in early January as a round of very bad publicity hit its reputation. A profit warning issued earlier this month also contributed to value destruction. Its earnings profile is just as important as the quality of its assets base, in my view. 

Assets Base

Blinkx reported total assets of $302m as of 31 March 2014. It has about 400m of shares outstanding, which means its assets are worth 44.1p per share. But how much is Blinkx really worth?

On March 31 2014, cash and equivalents totalled $126m, or 18.5p per share on a fully diluted basis. This is roughly 50% below Blinkx’s current share price. Receivables stood at $39.7m, for about 6p per share.

So, the combined value of receivables and cash stands at 24.5, or 33% below Blinkx’s current market valuation. The gross cash position has more than doubled year-on-year. Under a bull-case scenario, Blinkx’s £115m of goodwill and intangibles would be valued at their book values. Then, some 16.8p must be added back to the value per share attributed to Blinkx’s current assets — for an implied upside of about 10% or so. 

Liabilities/Cash Flow

There are $40 million of liabilities in the form of account payables on the balance sheet — and that’s it. Operating cash flow came in strong for the last 12 months to the end of March.

For me, Blinkx is a resounding buy at this level, yet I would probably get out of it after a 20% paper gain by the end of the year.

(This author misstated the upside of Blinkx shares when the original article — “A 70% Upside For Blinkx plc” — was published on 14 July. That was due to a mis-calculation of the per-share asset values, which was based on the use of a wrong currency. Blinkx reports in $ and not in £, as this author originally said. Apologies to all our readers.)

It's going to be a roller-coaster ride in the next few weeks of trading, so Blinkx may not be the most obvious bet at this point in time. But it should be included in a diversified portfolio. 

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Alessandro Pasetti has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.