The fair value of Blinkx (LSE: BLNX) hinges on its merger and acquisition (M&A) strategy. There are reasons to believe the online advertising group could surprise investors in the next few quarters, particularly if it continues to grow ‘inorganically’ (for instance, by acquiring assets). If you are keen to add Blinkx to your portfolio, do not forget this is a highly speculative bet and you may walk away empty-handed if things do not go according to plans.
Capital Allocation
With low capex requirements, part of its gross cash pile could be deployed to mop up smaller players in the next 24 months or so.
Essentially, Blinkx could “acquire” earnings of targeted assets, while diversifying its asset base away from its struggling desktop business. A strategic U-turn is on the cards and appears inevitable, given that mobile is the fastest growing segment in online advertising.
Blinkx agreed to acquire AdKarma in December, for an initial consideration of $15 million in cash, and an additional $5 million in cash or stock, payable by December 2015. It spent $20m to secure about £1.7m in net earnings. Blinkx said “it was encouraged by AdKarma’s high-growth mobile business”.
Assuming Blinkx spends most of its gross cash pile for bolt-on acquisitions in the next couple of years — which is very likely, based on its track record in M&A — it could add between £5m and £10m of net earnings to its bottom line, which would come on top of £8m of net income that some analysts have pencilled in for the period, for a lowly implied forward p/e ratio of up to 4x, assuming a constant share price and shares outstanding.
Value & Risk
Blinkx is surely in restructuring mode. The net cash-adjusted value of its shares is just 23% the value of its total sales. Blinkx has been hammered in the last couple of years, but most analysts covering the stock believe that Blinkx could be worth at least twice as much as its current value. I think such a view is not insane, but carries big risks.
It’s hard to gauge the fair value of Blinkx based on trading multiples: Blinkx’s dreadful performance in recent times doesn’t help, and forecasts are not reliable, either. But for investors willing to embrace risk, one key financial metric to keep on the radar is operating cash flow, which is where Blinkx’s strength may reside.
Blinkx must invest to bulk up in the right places — away from desktop, of course — and its balance sheet is over-capitalised, which is a good thing. Based on the value of its assets, I would feel comfortable adding Blinkx to my holdings at a price in the 25p-45p range, but I would not expect my investment to yield dividends for at least a year or so, although this is an opportunistic trade, so I would certainly be seeking short-term gains.
