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Why I won’t buy Buddy Platform Ltd at this share price

Some tech shares have proved highly rewarding, providing investors with massive returns over short periods of time.

So far that has been the case with Buddy Platform Ltd (ASX: BUD).

Buddy Platform provides a device called Buddy Ohm that monitors the consumption of resources in buildings which tracks the use of electricity, gas and water.

The technology is designed to allow users to better monitor their use of such resources in order to promote smarter consumption habits.

Some investors appear to have expressed enthusiasm for Buddy Platform as its share price has gained more than 250 per cent in a year.

But will it last?

Over the past few months Buddy’s share price has been sinking, going from 40 cents in November to its current price of 22.5 cents, representing a decrease of more than 40 per cent.

And it could keep heading down.

In financial year (FY) 2017, Buddy Platform reported a loss of almost $17 million, an improvement on FY 2016’s loss of more than $26 million.

While the company increased its revenue from about $43,000 for FY 2016 to around $1.05 million for FY 2017 it also increased its advertising and marketing expenses by almost $1 million, which presumably helped the company realise its gain in revenue, although at a seemingly high price to pay.

On the subject of high prices, the company’s “employee benefits expenses” more than doubled in 2017, going from about $2.02 million in FY 2016 to around $4.4 million in FY 2017.

On top of that, Buddy Platform forked out about $7.4 million in share based payments for FY 2017, although that was significantly below FY 2016’s figure which exceeded $11 million.

Additionally, Buddy Platform ended FY 2017 with a negative operating cash flow of about $8.6 million, but only had $6.1 million in cash and cash equivalents.

Buddy Platform stated it has signed customer contracts representing minimum future revenue commitments exceeding $22 million.

Perhaps the company can turn things around.

But until it’s clear the money is coming in, I would steer clear of Buddy Platform.

If you’re looking for tech companies in stronger financial positions than Buddy Platform then I would suggest taking a closer look at Altium Ltd (ASX: ALU) or Nextdc Ltd (ASX: NXT).

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Motley Fool contributor Steve Holland has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Altium. 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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