Monitise can survive V-bomb

Oh dear. Just as days after the market expressed relief that Monitise had "sprung no surprises", one of its biggest customers and major shareholders announced it is selling up. Its share price plunged by over a third to just 29p and the mobile payment technology whizz must wonder what's next?

All seemed well when management confidently declared earlier this week that 2014 had been a "transformational year". After a series of revenue warnings, the City accepted that the switch to longer-term subscription-based business was sensible, and new contracts have kept the company on track to hit the all-important target of 200 million registered users by 2018.

But Visa Inc shocked pretty much everyone on Thursday when it admitted it was "reassessing" its 5.5% stake in Monitise and "will also be lessening its dependence on external mobile development resources."

"This reduction in ownership and associated influence is consistent with Visa's investment practice to seed emerging players and, over time, taper that influence as the partner company grows," it said. Visa Inc took a 14.4% stake in 2009 (remember, this does not include Visa Europe, a larger customer of Monitise).

Putting the remaining 107.4 million Monitise shares up for sale will create a substantial stock overhang. Analysts at Barclays reckon that’s "manageable," but sympathise with the market reaction. "Now more than ever, the ball is in management's court to provide tangible evidence that the product set development is working and that user growth is set to accelerate," they say.

More worrying is Visa Inc's decision to drop its commitment to the Monitise product roadmap, instead pumping cash into its own in-house systems. But even here, the broker reckons the decision will not hit Monitise's finances until 2017, and even then by as little as £10 million. By then Canaccord Genuity estimates the company will be generating annual revenue of £372 million and adjusted pre-tax profit of £64.3 million.

"We see the stock reaction yesterday as extreme and clearly went beyond discounting a stock overhang and the loss of one customer, in our view," writes Barclays. "Therefore we believe, in the absence of more concrete insight into Visa Inc’s rationale, that Overweight is the right rating at this level."

The Monitise story remains intact and the potential is clear. Non-executive chairman Peter Ayliffe has just bought £75,000 of shares at 27.75p, too. Unfortunately, the company has acquired a reputation for surprises. True, not all are of its own making, but this can put investors off nonetheless. Now entering a “quiet period” post the results, it must rely on catalysts such as new contracts and user growth to win them over.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.