A high-risk bet on the rise of mobile money

If you're a fairly small company, forming a partnership with a corporate giant can make a huge difference.

The classic example is Microsoft's partnership with IBM in the 1980s. Once IBM started using Microsoft's operating system in its early PCs, Microsoft was well on the way to global domination. Arm's partnership with Apple in the early 1990s is another good example. Without that link-up, Arm would probably never have become the UK's leading technology company.

So last week I was excited to see that IBM has announced a partnership deal with a UK technology company called Monitise.

Try 6 free issues of MoneyWeek today

Get unparalleled financial insight, analysis and expert opinion you can profit from.

Start your trial

Sign up for MoneyWeek’s free twice-daily newsletter.

Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.

Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.

Sign up

Now, I'm not suggesting that Monitise will be the next Microsoft.

But the IBM deal does mean that the stock definitely warrants further investigation

What does Monitise actually do?

Monitise

(LSE: MONI)

Monitise offers three main products. The first is Bank Anywhere', which enables users to check their bank accounts on their mobiles. The second is Pay Anyone' which gives users the freedom to pay bills from anyone to anywhere.

These two products have enabled Monitise to build working relationships with more than 350 financial institutions worldwide. These include Royal Bank of Scotland, Visa, MasterCard and HSBC. Its relationship with Visa has been especially close Visa Europe owns a 6% stake in Monitise, while Visa in the US has 5%.

Monitise is also working with some non-financial companies too the best-known is Telefonica. There's plenty of potential here for mobile phone networks to use the Pay Anyone' technology and muscle in on the banks' traditional monopoly in payment services.

The third product is called Buy Anything'. It's a secure shopping platform for mobiles.

In July, Monitise announced a deal with IBM which was then strengthened last week. The partnership means that IBM will now market Monitise technology under the IBM brand to a wide range of businesses, including retailers and mobile phone networks.

Some of Monitise's staff will move across to IBM, and Monitise products will now include some IBM technology. Monitise technology will now be hosted at IBM big data' centres.

There are no guarantees here, but I think this partnership with IBM could deliver a big boost to Monitise's growth. It's also worth noting that IBM has a partnership with Apple to market the iPhone as the best mobile offering for business that may open up further opportunities for Monitise.

I have tipped Monitise shares before

MoneyWeek

Five small cap stocks worth a flutter'

That amply illustrates some of the risks you take when you invest in small caps. So what was behind the fall?

The company had warned that revenue would be about 30% below expectations for the year ending June 2014. Monitise's explanation for the fall was that it had adjusted its business model.

Previously, customers were expected to pay a large upfront free, and then pay much smaller recurring licensing fees. Monitise is now charging smaller or non-existent upfront fees in exchange for higher recurring payments later on.

I must say that this seems like a sensible move to me. The change should mean that more customers will sign up as they won't have to pay so much money upfront. All being well, it should enable Monitise to make more money in the long term as the recurring payments continue to be made.

That said, even after this year's fall in the share price, Monitise looks expensive at first glance. The company isn't making any profit, and that isn't likely to change until 2016. Full-year results are expected later this month, but it looks like revenue will come in around the £93m mark.

With a £961m market cap, that will put Monitise on a very hefty price/sales ratioof ten. The ratio is so high that I can't help thinking back to the mad dotcom days of 1999/2000, when so many tech companies were overvalued.

What's more, Monitise could get squeezed out by competitors. There's lots of speculation that the likes of Google and Facebook will want to enter the mobile banking space. If that does indeed happen, there are no guarantees that these big tech companies will partner with Monitise.

And although I think there's a strong chance that Monitise will become a major player in mobile banking, it may be tougher to become a major player in mobile commerce where there's more competition. (That said, Monitise's recent acquisition of the company behind the Myvouchercodes website, Markco Media, may help in this area.)

It's also worth noting that Monitise is one of the most shorted shares on the London stock market. In other words, a lot of investors have placed a bet that the Monitise share price will fall.

But I'd still rate Monitise a high-risk buy

Yes, it could all go wrong. But I'm in no doubt that mobile banking and mobile commerce will grow rapidly from here, and the IBM deal makes me more confident that Monitise can be a major player in this area.

It's also clear to me that mobile banking itself is going to become far more important within our day-to-day money management. My colleague David Thornton over at Red Hot Penny Shares has been focusing on this sector a great deal recently. You can read more about exactly what's got David excited about it in his special report here.

Red Hot Penny Shares is a regulated product issued by Fleet Street Publications Ltd. Your capital is at risk when you invest in shares; never risk more than you can afford to lose. Forecasts are not a reliable indicator of future results. Penny shares can be riskier than other investments they can be relatively hard to trade and if you need to sell soon after you've bought you might get less back than you paid. Please seek independent financial advice if necessary. Customer Services: 0207 633 3601.

Our recommended articles for today

Emerging markets: These three charts show we're in a bull market

This technology could soon replace your bank account

On this day in history

2 September 1666: The Great Fire of London starts