Monitise Plc: A ‘Story’ Stock Gone Sour

monitiseMonitise (LSE: MONI)  the usual characteristics displayed by the hottest of AIM stocks: a great ‘story’, the potential for lottery-like winnings, and a large herd of excited private investors posting on financial bulletin boards.

Monitise joined AIM in 2007 with the help of a £21m placing at 22p a share. The shares reached a high of 80p in February this year, but have been falling since; the price is 35p at the time of writing. Is Monitise a story stock gone sour?

The Monitise story

Monitise was founded by former-rugby-star-turned-businessman Alastair Lukies, who set out to create the world’s first technology platform for the delivery of mobile banking and payment services to the mass market.

Lukies cannot be accused of understating his ambitions for Monitise. For example, he told the Telegraph: “We are a unicorn now, but we’re going far further” — a reference to American ‘super-unicorns’ (tech businesses worth more than $100bn).

Moving targets

Monitise’s revenue has grown from virtually nothing in 2007 to £95m for the year ended 30 June 2014, but the company continues to be loss-making. Furthermore, management hasn’t impressed on meeting key financial cash targets.

In February 2009, the company said it expected to be monthly cash break-even during its financial year 2011. By 2011, the break-even target had slipped to 2013.

In Monitise’s annual results announcement in September 2012, management switched from talking about cash break-even in 2013 to EBITDA break-even. EBITDA (earnings before interest, tax, depreciation and amortisation) is commonly — and erroneously — taken to be a proxy for cash flow. In particular, EBITDA doesn’t take into account capital expenditure and working capital requirements, which are onerous cash burdens for young, fast-growing companies.

Despite the switch from a cash break-even target to an easier-to-meet EBITDA break-even target, the target has slipped again — currently, financial year 2016. Cash break-even, of course, will be behind EBITDA break-even.

Dismal dilution

The persistent delay in Monitise turning cash-flow positive has meant management has had to issue more and more shares to raise cash to fund the business, thus diluting existing shareholders. The number of shares in issue has risen from 254 million at flotation to almost 2 billion today.

Monitise currently has net cash on its books of £146m, largely thanks to a fundraising at 68p a share in March. However, while management says this will enable it to “execute against our strategy”, I reckon with cash outflows running at over £60m a year and the Board’s history of failing to meet break-even targets, we could see additional fundraisings and dilution for shareholders.

Furthermore, recent slowing revenue growth and a switch from upfront licensing to subscription fees has raised doubts about Monitise’s business model and future prospects. And, of course, the lower the share price and the lower the market’s confidence in the company’s business model, the more shares that Monitise will have to issue to raise any necessary funds.

As you may have guessed, speculative story stocks, such as Monitise, aren’t my cup of tea; the bitterness of the risks tastes more strongly on my palate than the sweetness of the possible rewards.

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The Motley Fool owns shares in Monitise.