Should I Invest In Blinkx Plc Now?

blinkxI can see why Blinkx (LSE: BLNX) attracts attention from investors. The internet media platform provider’s share price spent the first nine months of 2014 diving back to previous lows — and it’s still dropping.

Shorters will feel flushed with success, but those hankering after a long-side flutter could be squirming in their seats in anticipation as the firm’s valuation approaches its net asset value.

Spiky chart

A spiky share-price chart stirs the animal instincts in investor/traders like me. Blinkx may be down, but it’s not the first time. Back in 2012, the shares plunged from highs around 160p to around 40p. It’s what happened next that focuses minds — during 2013 the shares struck 230p, enriching and vindicating bullish believers, as long as they sold right there!

Nothing much caused that 2012 drop. Perhaps the firm’s valuation ran ahead of itself and the movement was no more than a correction. This time it’s different — Blinkx issued a worrying trading statement on 1 October and the market saw it coming.

It’s almost as if events are bearing out Harvard professor Ben Elderman’s blog comments from the beginning of the year — he questioned the validity of Blinkx’s business model, fingering the firm as a sham with questionable business practices and unsustainable profits. The firm denied the allegations and some sources have it that certain investing institutions commissioned the prof’s research, leading to suspicions of market manipulation. Whatever the truth, the blog catalysed the Blinkx’s latest share-price collapse and the recent trading statement sealed the deal.

Everything is down

Trading is grim. Blinkx reckons revenue generation slowed “considerably” during the company’s first quarter and that trend continued during the second quarter, amplifying the effects of seasonally slower summer months.

Blinkx expects first-half results to show revenues of $102 million to $104 million, down from $111 million achieved in H1 2013. At best, profits will likely hit break-even, or to put it another way, zero — a big fat nothing. As if to prove the point, the firm is eating into its cash reserves, too. Cash and equivalents are running at about $115 million, down from the almost $127 million Blinkx had stuffed away in May.

How is Blinkx supposed to make money?

It hard to figure out how Blinkx is supposed to earn its living. Jargon and abstractions fill the firm’s website, which isn’t helpful. Professor Elderman seems to imply that Blinkx’s communications are deliberately obfuscatory, but let’s give the firm the benefit of the doubt — perhaps the firm just needs to retrain the PR department!

Understanding the business model is essential for those tempted to invest now. Please do your own research, but here’s my best shot. Blinkx spun out of a firm called Autonomy in 2004 with advanced technology under its arm in the area of internet video search. Today, Blinkx relies on its patented COncept Recognition Engine (CORE) to find video content online using speech recognition, and text and image analysis, to identify the meaning and context of video content to improve the relevance to consumers’ searches. The idea then is to target advertising to run alongside what people are watching — for example, if I watch a film clip about hill walking, adverts for hiking boots fill my screen. That kind of thing.

Blinkx reckons it operates as a broad digital media technology, distribution and monetisation platform that connects consumers, advertisers and content. Through partnerships with hundreds of media companies, including ABC, NBC, Conde Nast, Reuters and Bloomberg, Blinkx indexes and search-enables millions of hours of video content. Advertisers pay Blinkx to place their advertising effectively and most of the revenue appears to come from brief 30-second video adverts, but the firm also does cheaper banner adverts and other stuff (I think!).

Blinkx seems to own some of the networks and channels that broadcast video programmes, and mainly generates its revenue from the US. Future growth opportunities include the expanding mobile smart-phone market.

What now?

Blinkx, no doubt, competes with others offering a similar service. It’s clear that trading is dire and the firm faces profit collapse.

The recent update dangles a carrot saying that, since July, month-on-month growth suggests trading has reached an inflection point. According to the directors, mobile remains a high-priority area and they expect it to contribute approximately 20% of revenues during the next trading period.  There is no mention of profit, though, so we’ll have to wait and see.

I’m watching events closely. The firm’s tangible net asset value seems to run around 20p per share. If the share price drops below that, and if the chart looks like the trend has changed from down to up, Blinkx could have the makings of a speculative punt on the long.

Blinkx has the potential to turnaround but it looks risky. The biggest and fastest capital gains can come from situations that feel unsafe, but we can also lose our shirts from such 'opportunities'!  For growth offered at a reasonable valuation I'm keen on a firm identified as The Motley Fool's Top Growth Share for 2014 and beyond by our small-cap specialist.

When growth potential meets a modest valuation, the attraction for investors like me magnifies, as in the case of this company.

You can run your own analysis over this firm to see if it could boost your portfolio returns by downloading the Fool's free report.  The report is free but time-limited. Click here.

Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.