3 Reasons To Avoid Blinkx Plc Now

The share-price fall at Blinkx (LSE: BLNX) has found a bottom — at least for now.

The internet media platform provider revealed a half-year balance sheet carrying about 28p per share in net cash, roughly the same as today’s share price, so it’s no surprise that attention turns to upside recovery potential.

Is the worst over?

In November, the directors said they think the worst is behind Blinkx and that, since July, month-on-month growth suggests trading has reached an inflection point.  They expect mobile-related sales to contribute approximately 20% of revenues during the current trading period.

However,  let’s remember that the recent half-year report brought news of a mammoth profit collapse, and revenue generation slowed “considerably” during the period, amplifying the effects of seasonally slower summer months. It’s tempting to look at the firm’s trading record and assume that past glories can be re-achieved on profits. However, I can think of at least three reasons to be cautious:

1) Poor operational and strategic visibility

Blinkx’s business is unlike that, say, of a biscuit factory. I can understand how a biscuit factory can grow its revenues and profits. I can ‘see’ the market and research the biscuit-eating trends of the public.

Blinkx is different. Blinkx is like a black box to me. Revenues, cash flows and profits come out, or not, but I’ve very little idea of how the firm generates them from within that box. I’ve no idea about the dynamics of the industry in which Blinkx participates as well. Maybe you have, but I haven’t, and that makes investment decisions uninformed from my perspective.

2) Sector volatility

It’s clear from Blinkx’s dramatic and sudden profit collapse that the firm operates in a very fast- changing industry. What works one day apparently fails to work the next, so firms such as Blinkx must adapt and change at speed. That’s a hairy commercial set-up that must be easy to misjudge. The consequences of misjudgement could be catastrophic for the firm and its investors.

3) Poor economic franchise

The best businesses command a robust economic franchise that keeps earnings and cash flow pumping. Maybe it’s a unique selling point, or market domination, or some other quality that translates into profitable demand for the firm’s goods and services, and keeps customers coming back for more.

That’s not Blinkx. Blinkx had the rug pulled from its business model seemingly over ight and now it scrabbles to migrate to mobile, an alternative mode of business. Is Blinkx a commodity-style business, a business with no unique advantage over its competitors? If so, perhaps the kind of business volatility we’ve seen recently at Blinkx may become a recurring theme. Perhaps the economics of the sector will change again, or maybe a switch to mobile-generated business will be less profitable than the directors expect.

Whichever way we look at it chasing the market around as it shifts to try to eek out a profit is not present as a robust strategy.

What now?

A year ago, Blinkx delivered post-tax profits in excess of $10 million; the recent six-month period produced a loss of almost $10 million — that mammoth $20 million differential occurred over just 12 short months. That’s why the share price dived from 220p or so at the start of 2014 to under 30p today.

It’s tempting to bet on Blinkx reversing that trick as it builds a new business led by mobile-driven applications. Who knows where the share price may take if that comes off. That said, Blinkx today is the very definition of a punt, I reckon, so long-term-buy-and-holders should look away now!

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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.