Last weekend, a friend introduced me to Monitise plc (OTCPK:MONIF). He shadowed Douglas Kass into this stock after doing his own due diligence and suggested I look into the opportunity. Following a glancing review of the financials it was exceedingly clear that this was not a security that remotely meets my selection criteria. I quickly wrote it off.
On Tuesday, my friend sent me a retweet of a Doug Kass Monitise endorsement. Having lost interest in this concern, I hastily replied:
Surprisingly it was Doug Kass, rather than Whitt, who was first to rebuffed my assertion, tweeting:
I was in no way expecting a reply from Mr. Kass.
For those who don't know, Doug Kass is a legendary hedge fund manager who currently operates Seabreeze Partners Management as president and founder. Just last year he was selected by Warren Buffett to present the bear case against Berkshire Hathaway at its annual shareholder meeting in Omaha. While his résumé and accolades go on, the point is: Mr. Kass is a highly sophisticated money manager.
Due to his sophistication and enthusiasm, I heeded Mr. Kass's advice and carried out a concentrated analysis of Monitise despite the superficial contention between the companies financials and my value oriented principles. Admittedly, after concluding my research, there is a lot more to Monitise than I first envisioned; I will delve into the details soon. Even so, I remain pessimistic.
The following will unveil my bearish assessment, hopefully provoking an informative debate. If you intend to take an ad hominem approach there is no reason to continue past this point. In no way am I claiming to be a superior analyst to Mr. Kass. However, if you are interested in a merit based evaluation of Monitise's strengths and weaknesses, then I suggest your read on and actively participate in the comments.
The company's mission is "to help consumers bank anywhere, pay anyone and buy anything from their mobiles." This is a noble, albeit common, endeavor. What separates Monitise from countless competitors in this space (think Google GOOG, PayPal EBAY, Square, etc) is its approach. Rather than starting with the consumer, Monitise focuses on the financial institutions, empowering them with custom software solutions. You might think of them as a niche IT contractor, developing and maintaining highly functional, feature rich, branded mobile applications for their clients. Here are some of the key mobile features Monitise software delivers:
- Instant Balance Checking
- Ability to Cash Checks
- Money Transfers
- Bill Pay
- Request Money
- Mobile Banking Alerts
As of this writing there are no wallet applications available that combine all of the features above. If your bank doesn't offer a mobile app the only way to get this functionality is some combination of existing apps.
How Monitise Monetizes
For the full year 2013, Monitise generated revenue of £72.8 million, up 50% organically from the full year 2012. The revenue can be separated into:
- £29.4 million in Development and Integration (up 2% organically). Essentially the setup charge for the financial institutions.
- £43.4 million in User Generated revenue (up 119% organically). This can be broken down further into product licensing revenue and transaction based revenue. These reoccurring charges are levied on the services the financial institutions chooses to license (Pay Anyone, Bank Anywhere, Buy Anything, etc.) and the transactions occurring within the software ecosystem.
Taking A Step Back
At this point I would like to solidify the 'value add' Monitise provides to the mobile transaction system. In the 2013 annual report, Duncan McIntyre (Chairman at the time) gave a very practical explanation of the company's role, saying:
"..we are not setting out to create new payment rails but rather to leverage existing and trusted payment infrastructures be they card or bank account based."
It is important to understand that Monitise does not offer proprietary network connections. Instead they help financial institutions, and their customers, access the already existing connections or "rails".
Direct Competition - Monitise has few rivals as a provider of mobile banking software. Financial institutions aspiring to improve engagement and mobile presence are all but exclusively limited to either Monitise or IT infrastructure providers (think IBM, Accenture ACN).
IBM would be especially intimidating due to its tremendous resources, remarkable ability to integrate technology, and MobileFirst focus. Furthermore, IBM offers advanced analytics for smarter banking powered by Watson which represents an enormous value added service.
However, in September of 2013, Monitise and IBM announced a strategic collaboration which should be viewed as nothing less than a monumental achievement as far as Monitise is concerned. The benefits are three fold: 1) the mitigation of an alarming competitor, 2) the immense value added to its existing service, and 3) the emergence of a potential buyout candidate.
Indirect Competition - Indirectly Monitise encounters heated competition from wallet and financial tracking apps, all vying to attract mobile users. Contenders in this space include: Mint, Isis, PayPal, Google Wallet, Check.me, Square Wallet, Bitcoin Wallet, Dwolla, Lemon Wallet, Apple Passbook (AAPL), Chirpify, etc.
As can be deduced from the revenue break down, Monitise is not growing its Development and Integration revenue (40% of total FY 2013 revenue mix and declining). A perfectly logical and anticipated trend considering the virtual one-time nature of these services. Consequently, it is vitally important that the end consumer, not only adopt, but also regularly engage with the apps Monitise builds and brands for its clients. Winning at the consumer level is compulsory to drive User Generated revenue and propel the company forward into its lofty valuation.
So who owns this space? It is decidedly unresolved at the moment. To quote the Monitise's Strategic Director Richard Johnson "The stakes are huge, but because the outcome is not ordained there are going to be big winners and big losers."
The Future of Mobile
Because this outcome is unsettled, we must attempt to analyze the players who will shape the future.
Financial Institutions - Mobile wallet applications threaten to commoditize financial institutions by striping them of user data and engagement. Once a user links their bank account to a third party wallet the bank no longer gets information regarding the end users spend. The resulting loss of data robs banks of their competitive advantage so far as consumer banking is concerned. It is no wonder Monitise believes its responsibility is to "defend and extend the role of banks in mobile payments and commerce." It is also not surprising that Visa has partnered with Monitise (and taken a substantial equity position) in an effort to retain its valuable user data. Monitise will continue to represent the best interests of the financial institutions, hence I postulate it will remain a favorite among them.
Mobile Users - While financial institutions play a role, the mobile consumer ultimately decides which apps best meet their needs. As we previously discussed, Monitise depends on user engagement, therefore the consumer will subsequently decide its fate.
Presently, third party mobile wallets possess a slight advantage, but the gap is widening. Monitise enables financial institutions to offer convenient features to its customers, but its Achilles' heel is fragmentation.
As a mobile consumer, I have three bank accounts, four credit cards, and three investment accounts. In a world dominated by Monitise's white-label solutions, TEN different apps would be required for mobile interaction with all my accounts. However, my current setup requires only two, Google Wallet and Check.me.
I review all my balances and perform online bill pay with Check.me while Google Wallet takes care of my spend. When I want to buy something, I tap my wallet app then simply choose which account will fund the purchase. Through a partnership with MasterCard, Google Wallet utilizes the exceptional convenience of Paypass Tap & Go, enabling swift purchases at hundreds of thousands of merchants. If you have not yet observed mobile Tap & Go in action, I strongly recommend viewing this short YouTube clip showing off the extraordinary technology. Since Google already knows more about most us than any one financial institution they can present more relevant offers based, not only on spending habits, but also search data, Google+ interactions, Gmail information, etc.
Already rich in functionality, mobile wallets are under rapid development and enhancement. It won't be long before all coveted features are found in one wallet app and eventually NONE.
The future of mobile commerce does not reside in an app, it inhabits the entire operating system and hardware of your mobile world. In December 2011, Verizon representative Jeffrey Nelson responded to questions regarding Google Wallet:
"Google Wallet is different from other widely-available m-commerce services. Google Wallet does not simply access the operating system and basic hardware of our phones like thousands of other applications. Instead, in order to work as architected by Google, Google Wallet needs to be integrated into a new, secure and proprietary hardware element in our phones."
There are two key takeaways from Mr. Nelson's statement: thousands of applications are competing in this space and Google is separating itself.
This deep integration will result in exceptional functionality. Soon enough, users will simple say "Ok Google, buy this" or they might merely look at a QR code and a notification will present itself on Google glass inquiring if they'd like to make a purchase.
In order to seamlessly weave an m-commerce solution into the fabric of a mobile operating system it is necessary to control the software infrastructure to some degree. Below is a graph from Gartner, forecasting the future mobile OS market share:
Unfortunately for Monitise, Google's Android and Apple's iOS will occupy a large majority of this market share going forward. Further bad news, Google has strong ties to many hardware manufactures (Motorola, Samsung, etc.) and Apple designs its hardware in house; this buttresses their already substantial advantage.
Some will not agree with my assessment of the future of mobile commerce, but it seems as though Monitise management might not be among that faction. In fact, Monitise has inked a deal with beleaguered smartphone maker BlackBerry (projected at 2.4% OS market share by 2016) to launch the BlackBerry Messenger Money service in Indonesia. The BBM Money app appears to represent Monitise's first experimental foray into deep OS integration, demonstrating its recognition of the rapidly transforming mobile commerce space. Regardless of its reason for partnering with BlackBerry, Monitise has an uncertain future to say the least, facing off against enormous heavy weights as well as countless hungry start-ups.
Here is a snapshot of Monitise's past five years:
|Weighted Average Shares Outstanding (mil)||1,350.3||775.8||686.0||453.5||329.1|
|Shares Outstanding Growth||74.0%||13.1%||51.1%||37.8%||29.4%|
|Total Revenue (£ mil)||72.8||36.1||15.3||6.0||2.7|
|Rev/Share (£ pence)||5.39||4.65||2.23||1.32||0.82|
|Total Loss (£ mil)||(38.1)||(21.0)||(14.5)||(16.8)||(13.7)|
|Loss/Share (£ pence)||(2.8)||(2.7)||(2.1)||(3.7)||(4.2)|
|Total Users (mil)||24||17||4.5||2||0.8|
|Reported Equity (£ mil)||241.0||153.0||32.8||14.2||9.3|
**Note: When calculating total loss I used the reported adjusted figure, but added back the share based payments amount that was adjusted out.
The first statistic of this table is very telling; shares outstanding are surging higher each year. Today, the number sits at approximately 1.68 billion up from 0.33 billion shares in 2009. Investors have a tendency to pay too much attention to the company wide numbers while failing to vigilantly track their own share of those results. In this case, Monitise has shown impressive revenue growth over the past five years, yet shareholders have only captured a portion of that growth due to rapid dilution. Last year for instance, the company reported revenue growth of 102% (50% organic growth) yet the equity holders recognized a much smaller 15.9% increase.
Additional red flags jump out while examining bottom line statistics. Throughout the past three years, Total Loss is swelling and the Loss/Share has leveled out. Over that same period, total users have soared from 4.5 million to 24 million, a more than 500% increase. What makes this so concerning is that Monitise's business relies on the high margin User Generated revenue. The most profitable dimension of the company has seen tremendous growth yet it goes unnoticed on the bottom line. If Monitise is unable to generate positive income (or even contracting losses) after a greater than 500% increase in end users, when will it?
Finally directing attention to the company's book value we observe a mildly respectable figure of £241 million in 2013 relative to its £1.24 billion market cap. But even this tally is deceptive, the company has managed to balloon intangible assets to a whopping £193 million; the difference of the two figures, £48 million, constitutes the tangible book value.
It is an onerous, if not impossible, task to achieve an accurate intrinsic value for a growth company such as Monitise. There are huge uncertainties surrounding when or if the company will become profitable, rendering a discounted cash flow analysis out of the question. While an attempt at a precise valuation would be worthless, I would be uncomfortable recommending anymore than five times revenue for this highly speculative concern.
One might assume that a company facing such formidable competition and uncertainty, without profitability in sight, would trade at a sufficiently depressed quotation; but with a market cap of approximately £1.24 billion, Monitise offers no such discount. If you are a long chances are you've generated a robust return thus far. I would advise engaging in some profit taking at this point. Other investors should avoid the security entirely.
As always, I strongly encourage all readers to form your own conclusions based, not only on this article, but your own personal research. Having said that, it is with the most respect that I disagree with Mr. Kass's endorsement and Goldman Sachs's (GS) conviction buy rating. There are too many dominant companies vying for this space to justify the premium Monitise currently commands.