7digital shares could double

Last month, we covered 7digital's (7DIG) meteoric rise, both in terms of publicity and its share price. The previously little-known digital music and radio platform provider doubled in value briefly on talk its technology would be used on Will.i.am's new smartwatch. It will be. And now, the company has signed a deal with one of Japan’s biggest electronics firms.

It's been appointed by Panasonic to launch a new custom-built hi-resolution music service under their iconic Technics audio brand. Music bought on the platform will be stored in a cloud locker ready for download to multiple devices

"'Technics Tracks', a service enabling music lovers to rediscover tracks and albums from an exceptional catalogue of 24-bit hi-resolution audio, will be available in the UK and Germany from January 2015," explains the company.

7digital has also announced it will launch its Radioplayer technology in Ireland for mobile devices by early December. Radioplayer, which the company licenses internationally, gives listeners easy access to streamed radio services. It's already up and running in the UK, Germany, Belgium and Norway.

"Both contracts involve upfront payments and monthly recurring revenues, which underpin the company's revenue expectations for the current year," said the firm.

That's why house broker finnCap keeps its forecasts unchanged. It expects sales of £11.4 million this year, rising to £14 million in 2015. Losses are tipped to continue narrowing until 2017 when 7digital should makes its first annual profit - £1.7 million.

In the first half, 7digital generated just £5 million of revenue as sales of low-margin music downloads fell, and it lost almost £2.8 million. Crucially, however, high-margin monthly recurring revenues (MRR) jumped by 43% to £2.21 million, sending gross margin up by 600 basis points to 49%.

According to finnCap, the shares could be worth 38p one day:

7digital is one of the few vehicles for investors to gain access to the fundamental change in music consumption. Although currently loss making, the business is building an impressive portfolio of client companies who are feeding its music service through to their underlying customers. It is establishing a very lucrative position in the global music industry and observing the prices being paid for similar services such as Beats, we continue to feel 7digital is substantially undervalued by the London market.

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.