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Why Game Digital PLC And Monitise Plc Are Falling Today

The shares of videogames retailer Game Digital (LSE: GMD) crashed 50% in early trade this morning, and are currently down 35% at 225p. Meanwhile, Monitise (LSE: MONI) continues this week’s steep decline. Trading at 20p as I write, the mobile banking technology firm has lost more than a fifth of its value since Friday.

Game Digital

Game Digital, formerly Game Group, went into administration in 2012, but was brought back to market by private equity last year at 200p a share. The shares closed yesterday at 348p, but the company released a grim Christmas trading update after hours covering the 11 weeks to 10 January, leading to this morning’s crash.

Game said that in the face of “intense competition”, which accelerated from Black Friday, the company discounted heavily, “offering gamers competitive product propositions through the bundling of games with hardware and reduced pricing”.

As a result, although UK hardware volumes increased 25.1% on the same period last year, group sales fell by 5.4%. The company warned that underlying earnings for the full year to 1 August are now expected to be no higher than last year — and this despite a good schedule of software releases in the coming months and the company having gained “a number of key exclusives”.

Ahead of the trading update, the City had been expecting Game to deliver full-year earnings growth of 40%. Earnings per share was forecast to be close to 25p, which would put the stock on a P/E of just nine. But there will be red ink all over analysts’ estimates this morning, and I reckon revisions give a P/E of more like 15.

The positive spin on the heavy Christmas discounting was that it brought in new punters and increased engagement (over 250,000 new reward card holders), helping to drive what chief executive Martyn Gibbs calls “customer lifetime value”.

Game’s share price may be much lower now, but the size of this year’s expected profit miss, suggests to me the shares are fully valued for the time being.

Monitise

Financial bulletin board favourite Monitise has a great ‘story’ and sports the usual contracts and partnerships with big blue-chip companies that story stocks tend to have. But I’ve had my doubts about Monitise’s prospects and valuation for some time.

Back in September, when the shares were trading at 35p, I cautioned Motley Fool readers about management’s persistent revision of the date when the cash-burning business (currently around £60m a year) will turn cash break-even. And warned that the company, whose shares in issue had increased from around 250 million at flotation to almost 2 billion, was likely to issue more shares in future.

In November, Monitise raised £49m through a share issue to strategic partners Santander, Telefónica and MasterCard that diluted existing shareholders by a further 8%.

While Monitise’s shares have been in a steady decline since hitting a high of 80p this time last year, no definitive reason has appeared for this week’s big drop. Whether the latest move down is merely excessive market ‘noise’, or whether it reflects business fundamentals or other concrete reasons that have yet to be publicly revealed remains to be seen.

I doubt Monitise’s shares will see any significant upward re-rating until the market has evidence that the company is making progress on moving to cash break-even.

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