Madness? Probably, but profitable madness.

A man who writes this vitriol about a company and his losses is surely not daft enough to even contemplate a punt in the same company at any future date? Only an idiot would do such a thing.

https://michae1mouse.blogspot.com/2019/04/liars-incompetence-and-foolhardy-choices.html

Yes I'm an idiot or maybe not so much actually? I'll explain, and I'll keep it brief.

On Tuesday, 7digital released a trading statement. If you read my blog regularly you'll know I am extremely au fait with this company.

I read the statement several times, and decided to risk some "punt" money. The market took some considerable time to react to 7digital's news, and hence I managed to purchase at below 0.2p. The shares finished up a little on the same day and advanced a little more on Wednesday. On Thursday the share price went berserk. I sold and took a 78% profit. If I'd held until Friday then I'd have made twice as much profit. Slightly galling, but a very successful trade nonetheless. I wish I could do that every week.

What next then? No idea short term, but here's my thoughts.

I know this company very well. I like the technology. I've always liked the story. I love the gross margins. The trading update gives cause for hope, but context is everything.

Things I liked. Trading for 2019 is in line with management expectations and their new strategy is performing well (apparently). They've significantly reduced operating costs. They've secured much of their expected revenues for 2020 and should achieve operational profitability by the end of the half year 2020. Plenty of positives and fortunately for me it clearly enticed many short term traders.

What could possibly go wrong?

Firstly, since I've been following 7digital, they've often said they're on the verge of profitability. Vintage 2018 trading statement:-

https://www.londonstockexchange.com/exchange/news/market-news/market-news-detail/7DIG/13527293.html

"Following the acquisition of 24-7 in June, operational restructuring has already begun and has resulted in the closure of the Company's office in Paris and a reduction in headcount. The Board is pleased to report good progress towards its goal of profitability in the current financial year." 

Didn't quite happen. In fact the company nearly went bust.

Secondly, despite all the positive noises, where are the figures that matter in the latest trading statement? There is no mention of cashflow, cash remaining or indeed revenue for 2019.

They have raised money over the last 12 months, but if you take a look at their last interim statement I can't for one moment imagine it'll be enough? They lost £3m between January and June 2019, and their balance sheet is just awful. They had a negative net asset balance of around £7m. Horrendous even after considering the cash they raised during the year.  My guess is another major dilution is on the way. The last one was at around 0.2p.

I've no idea what will happen to the share price in the short term, although after such a hefty spike I know what normally occurs. What I can say is that at the current £12m market valuation and a very good chance of further dilution and losses for another 6 months before the possibility of operating profitability, I'll stick to the sidelines again and watch for developments. There are some great little micro-caps that are currently priced less than 7digital with much stronger balance sheets. Some  already having achieved profitability.

Having been wrong about this one in the past, I don't offer any advice and maybe 7digital will pull the proverbial rabbit out of the hat, but with the share price having already 3-bagged in as many days, other options appear a better risk/reward unless they release earth shattering transformational news!

As ever, DYOR and this blog doesn't offer advice.

Good luck if you're a holder.