Mini Bubble Burst

Mini Bubble Burst

In October last year, we offered you the opportunity to buy a diversified digital ‘business’ that generated $16.9m in revenue, and made a $4.1m loss in 2013 – for $292m. Whilst this didn’t sound like a great deal (and it wasn’t), the business had amazing prospects according to market announcements that were replete with industry buzzwords such as ‘cloud’, ‘mobile’, ‘payments’ and ‘online scale’. In reflection of this, shares in the company were performing strongly.

Perhaps it was the way we sold it, but we had absolutely no takers – a smart move. For if we perform the same exercise today and combine the current market capitalisations for SmartTrans (ASX: SMA), Mobile Embrace (MBE) and Mint Wireless (MNW), despite many others in the market putting lofty multiples on revenues, not earnings at the time (only MBE was profitable), it appears that after the hype, our diversified digital ‘business’ has corrected in price to the tune of 32 per cent, which equates to $198m.

This poor performance is somewhat masked by the fact that generally lofty prices attract the desire to take advantage of enthusiasm levels, and this is true also here. Some $22 million in additional capital has been raised by our business since October 2013, and if we’re adjusting for this cash, then our market cap on a like-for-like basis has fallen by 39.7 per cent to $178 million. This is a severe correction in anyone’s language.

As it always does, the party ends with no warning, and a bang (the bang in this case being loss of capital). Such is the risk of being enticed into situations that look too good to be true – and an easy way to make a buck.

Those looking for a better way are again encouraged to read such books as John Burr Williams’ Theory Of Investment Value, for he put forward a relatively novel concept we have repeated before and will repeat many times over our investing lives. That being: the value of any stock, bond or business today is determined by the cash inflows and outflows – discounted at an appropriate interest rate – that can be expected to occur during the remaining life of the asset.

Share prices can rise and fall in the short-term for a myriad of reasons but to succeed longer-term and to avoid permanent capital losses, it’s the earnings power of a business that ultimately drives share prices and hence creates the ‘valuation support’ which is your buffer against material share price declines.