These companies are way too cool to have names like Moss Bros, A&J Mucklow or Jersey Electricity Company. They’re also way too cool to be making any profit! However, fans are not concerned with current losses; it’s the potential size of future earnings that turn heads.
Will it be boom or bust for investors in AudioBoom, blinkx and WANdisco?
AudioBoom describes itself as “the audio equivalent of YouTube“. In the three years to 2013, the company generated revenues of £136,000 and racked up losses before tax of £3.2m. The company’s main backer and other shareholders were unable or unwilling to continue financing the cash drain, and spent nearly a year touting the business to Venture Capital and Private Equity in the UK and US. There was no interest.
However, AIM investors lapped up the AudioBoom story when the company was reversed into a cash shell last summer with a notional market capitalisation of £7m. By 30 September, the market cap had increased 11-fold to £77m, and the company raised £8m in a discounted placing. At today’s share price of 9.6p, the market is valuing AudioBoom at £50m.
AudioBoom will continue to burn cash “for the foreseeable future”, and has some heavierweight “direct competitors” — it names Soundcloud in particular — and “indirect competitors”, such as Spotify, as well as facing the potential threat of better-resourced new entrants.
Venture Capital and Private Equity — who could have cut an infinitely better deal than AIM investors are getting today — turned AudioBoom down. That tells me there’s a high risk of bust for investors in this company.
Video search engine firm Blinkx at least has a money-making history, posting a $17m profit on revenue of $247m for 2013. The company’s shares reached 230p (market cap £850m) in November that year, but were hammered the following January by a critical blog post from Harvard University professor Ben Edelman. Edelman alleged that some of the company’s methods were so dubious that the business model was unsustainable.
Blinkx immediately denied the allegations, and on 6 May reported strong results and a confident outlook (with no further reference to Edelman). However, eight weeks later, the company issued a profit warning, blaming “industry-wide issues of efficiency and effectiveness … compounded by the lingering effects of the disparaging blog”. A further profit warning followed in October, and in November the company reported a half-year loss of $12m.
Today, Blinkx’s shares trade at 28.7p (market cap £115m), suggesting the market has serious doubts about the viability of the business model and management’s explanation for the poor performance. It’s been an 88% bust for investors who bought into Blinkx at the highs. Whether the shares will boom from the current lows looks a high-risk bet. In my view, Blinkx has it all to prove.
WANdisco does “Big Data” and is loss-making: $20m in 2013, with further heavy losses expected into the foreseeable future. This time last year, the shares were trading at 1,370p (market cap £325m). Today we’re looking at 397p (market cap a bit under £100m).
Nevertheless, WANdisco has its share of enthusiastic AIM investors, who are ready to keep stumping up cash in the hope of vats of jam tomorrow. The company has recently proposed another discounted placing to raise $25m.
How much money AIM investors can be persuaded to stump up — and how frequently — isn’t a particularly reliable guide to how successful the company will be in delivering shareholder value in the future. However, banks tend to be a little more judicious, so I’m quite taken with the fact that WANdisco has been able to negotiate a $10m revolving credit facility with HSBC on very attractive terms. HSBC said: “We were sufficiently impressed with the company’s growth prospects to make a commitment at investment-grade interest rates”.
WANdisco could just be the pick of the three firms as a potential boom stock for investors with a high tolerance for risk.
G A Chester 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.