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Widows, orphans, welfare scroungers who need a guaranteed £200 a month to feed their horse, those looking for safe dividends, yield and asset backing…look away. This stock is not for you. It is uber-speculative. But the risk reward play-off is very attractive indeed. AIM listed Forbidden Technologies (LSE:FBT) could go bust. But I doubt it will given that CEO and 72% shareholder Stephen Streater has bags of money thanks to the success of the last company he co-founded (Eidos). But there is a case for saying that the shares could go to $20 (£12). Even heavily risk weighting that I think a small investment ahead of results for calendar 2012 due out shortly could pay off big time.
Forbidden’s FORscene technology allows anyone to edit and upload video content onto the web very simply and cheaply. It proved how good the kit was during the Olympics when it won major contracts. Already it is pitching for a winning business for the next winter Olympics in frozen Russia and is pitching for business for the Brazil Olympics. The point is that major broadcasters are clearly adopting ForScene at an ever greater rate. Well I say ever greater rate. Revenues are actually quite low. In the first half of calendar 2012 sales rocketed by 91% to £348,159 and gross profits stormed ahead from £155,950 to £282,548. That was not enough to cover PLC and central costs so the company lost £156,908 (marginally less than a year previously) but with the very high gross margin you can see the operational gearing. For the full year what might we expect?
The company has issued a trading statement which said that it would beat analysts’ forecasts of revenue growth of 50% by a “respectable margin.” I would take that to mean that sales will have increased by c 70% from £466,000 to c£800,000. If that is the case then it would show that H2 sales were themselves 30% ahead on H1. The sequential growth is strong and the company talks of entering 2013 with a “strong pipeline” and says that the “board looks forward to further growth.”
That sadly is at the top line. The company continues to invest in that growth and so it will probably continue, notwithstanding its high gross margin, continue to operate a couple of hundred thousand pounds around breakeven for another couple of years at least. To date Forbidden’s growth has been in the professional media space and that space is big enough for it to continue to grow at a good all rate for many years. The billion dollar question is how quickly it can start to penetrate the B2C market. For mobile phone companies the only way to drive ARPU higher is by getting punters to transmit data and video and video editing is thus a potent weapon. Forbidden already has a FORscene type app allowing M2C customers basic video editing functionality on their portable devices. If it could persuade a big cell phone company to incorporate such an app in return for Forbidden taken even a miniscule percent of the RPU generated that would be a game changer.
If Forbidden levers its way into the consumer market (probably via one of the increasing number of distributor deals it is signing) then the potential profits it could make, given the size of the data market are of a telephone number scale. And that is where the talk of how this company could be worth $1 billion (£12 a share) comes from. But it is an if. Forbidden has been banging on about this for two years and so far nothing. One has to heavily risk weight this upside but arguably a 25p share price (£22 million market cap) already heavily risks weights the possibility. Well it clearly does.
If there is no B2C breakthrough Forbidden will grind out growth as it has always done. Cash is always a bit tight but with moneybags Streater standing behind it that is not a pressing issue. My guess is that compounding 30% sales growth will see sales reach £1.75-2 million by 2015 at which point it would be making a decent profit of half a million or more. That however is the downside scenario – the upside you know already.
If you want a safer tech stock where I see best case one year upside of perhaps 75% but far less downside risk, I wrote about one such enterprise the other day HERE.
If you want a flutter then Forbidden Technology at 25p fits the bill and is my free share tip for this week.
The premium shares service operated by Tom Winnifrith in association with ex t1ps senior writer Steve Moore is The Nifty Fifty. It will be publishing two new hot share tips this week – one a gold play, one a non resource play. Both will go live by Friday noon. You can catch those tips, get more details of the service and gain immediate access here
Tom Winnifrith can be followed on twitter @tomwinnifrith
