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Why fintech share Mobile Embrace Ltd dropped 50% today

It hasn’t been a great day to be a shareholder of mobile commerce company Mobile Embrace Ltd (ASX: MBE). Following a trading update this afternoon, its shares have plummeted a massive 50% to 12.5 cents.

Following in the footsteps of iSentia Group Ltd (ASX: ISD), Mobile Embrace has also downgraded its full year earnings guidance today following tough trading conditions for its domestic operations.

Mobile Embrace allows consumers to purchase products or services online and have the costs charged automatically to their phone bills.

But recent Australian telco carrier billing compliance changes have led to the company needing to make an operational adjustment to its domestic business.

This impacted several marketing channel partners and has caused a one-off event which has affected the company’s ability to acquire new customers within its target cost-of-acquisition range.

As a result the company has reduced its marketing spend until it believes it will provide a favourable return on investment.

Management believes this will impact first-half revenue by approximately $3.8 million and earnings before interest, tax, depreciation, and amortisation (EBITDA) by $1.7 million.

Although $1.7 million in EBITDA may not sound like much to panic about, it means that its full year EBITDA guidance is reduced by 17.5%. For a growing company trading on high multiples, profit downgrades of this magnitude are almost always punished by the market.

Even though management predicts a much stronger second half with full year revenue coming in at $70 million and EBITDA at $8 million, earnings will still be down on last year’s result.

Whilst I am optimistic that the company has a bright future in countries with low credit card penetration such as Pakistan, I wouldn’t jump into an investment at this stage despite it halving in value today.

I would suggest investors wait for a big improvement in its domestic business before taking the plunge. Until then telco providers Vocus Communications Limited (ASX: VOC) and TPG Telecom Ltd (ASX: TPM) would be much better options for investors.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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