The uphill struggle for mobile technology small caps21.03.2016

You would think that of all the sectors in the economy, mobile technology companies would have a huge scope for profit. Consider these facts released by little known small cap Mobile Embrace (MBE) ASX:

  • The internet is accessed more frequently on mobile devices than on desktop/laptop devices
  • The average mobile phone user checks their phone 85 times a day and spends 5 hours in total on their device
  • Direct carrier billing is expected to increase from $14.5b in 2014 to $24.7b in 2019
  • App downloads are predicted to climb from $102b in 2014 to $269b in 2019

Mobile consumers are willingly spending a large portion of their waking hours using their devices and are spending big on app downloads, so why is it so hard to make big profits in the sector?


Mobile technology small caps: Are they too risky?

While Mobile Embrace ASX, one of our tips, went up 25% in the past 9 months, it was still a struggle to get there. At a market cap of $120million it is by far the largest of the other mobile focused companies in its sphere such as:

  • Crowd Mobile (CM8) ASX
  • eServGlobal (ESV) ASX
  • Mint Wireless ASX

They have collectively failed to win the hearts of investors and have all had erratic share market performance.

These small companies are competing for space alongside big banks, big platform providers like Google, Apple and Microsoft and most problematically big telcos. It's tough business when telcos are demanding up to half of their revenue!

Similarly the operating systems mobile tech companies exist on are constantly changing. Who knows how they will operate in 3 years time?


Potential for Growth in mobile technologies

Despite all of the risks, there is still a crucial reason to stay in mobile technology investment. The answer, of course, is growth. With 1 billion mobiles on Google’s Android system alone, you can see there is huge potential for clever companies to make money.

The ephemeral growth is a concern. Angry birds and Candy Crush only capture their audience for so long before consumers move onto the next phase. That’s why growth management is so important. You have to carefully choose small caps that are constantly evolving.


Mobile Embrace: a case study in growth and management

Many mobile technology small caps have a tendency to wear out investors’ patience by spending everything and earning nothing. However, the six months leading up to December 31st 2015, Mobile embrace spent $19.7million on business and customer acquisition but still managed to generate $6.5million in cash. Truly impressive for a mobile technology company. Now we just need more savvy small caps to join them.

About the Author

Richard Hemming

Investment analyst and Editor of Under the Radar Report

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