Why I Won't Sell Motricity

I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer, too. But some growth stories are inevitably better than others. Hence this regular series. My goal? Out the Fakers, elevate the Breakers, and examine the growth stories stuck in between.

Next up: Motricity (Nasdaq: MOTR). Is this provider of mobile data services is the real thing? Let's get right to the numbers.

Foolish facts

Data current as of June 8.

Motricity is a story stock, one I've liked well enough to buy shares twice now. But with my real-money position down more than 60% as of this writing, the plot has proven to be more murder mystery than feel-good romance. The freefall has me thinking about selling. Trouble is, I'm not sure that's the right move. This is, after all, a heck of a story.

The largest wireless carriers do business with Motricity, including AT&T (NYSE: T), Verizon (NYSE: VZ), and Sprint Nextel (NYSE: S). Internationally, the company serves a consortium of Asian carriers called the Axiata Group. Since 2005, Motricity's mCore platform has been the source for more than 60 billion mobile data page views resulting in $2.7 billion in gross revenue for the company's carrier partners. Motricity is satisfying a large need that shows signs of getting bigger by the day.

Consider Groupon. The soon-to-be-public provider of discount vouchers has teamed with location-centric social networks Foursquare and Loopt to deliver coupons on the go. Called Groupon Now!, the service is reflective of a movement to give consumers data that's attuned to their surroundings -- be it a park, the office, or a shopping mall. Motricity's mCore platform allows for delivery of these and many other types of messages, all codified in a way that highlights each carrier's brand.

Researchers also speak to the opportunity. In its most recent 10-K annual report, Motricity cites data from Yankee Group that says the market for mobile content delivery platforms such as mCore is on track to grow 12% annually in North America through 2013. Worldwide, Yankee says the market will grow to account for $4.3 billion in revenue within the next two years, up from $2.9 billion in 2009.

The elements of growth

Source: Capital IQ, a division of Standard & Poor's. *Trailing 12 months.

Motricity is beginning to take advantage of the market opportunity, yet not as consistently as investors might like. Let's review:

• Growth investors like me love straight-line accelerating revenue growth leading to accelerating profit growth. Motricity hasn't quite mastered this. Revenue is growing faster than it did in 2009 but hasn't accelerated over the trailing 12 months. And while GAAP profits have proven elusive, net income adjusted for stock-based compensation, acquisition expenses, and other noncash charges more than doubled in the first quarter.
• Pricing power is also something we like to see. Or, in lieu of that, excellent cost management leading to higher margins. Gross margin is down from last year and 2009, which suggests Motricity is giving up some pricing power in favor of high-volume deals. That's a typical tactic in the traffic-delivery business, and I don't have a problem with Motricity following this strategy.
• We also like businesses that collect quickly. Here's where I'm most concerned. Receivables are growing far faster than revenue. We don't know if this speaks to a collections problem -- it could just be the result of signing volume deals that will pay off big over time -- but Motricity has seen cash flow from operations decline sharply since 2009.
• As a recent IPO, we don't yet have enough data to know whether Motricity is on track to seriously dilute existing investors. But what little data we have from its Securities and Exchange Commission filings says Motricity won't rule out additional equity financing. Investors should also expect substantial options grants to employees.

Competitor and peer checkup

Source: Capital IQ. Data current as of June 8.

This table can't tell us much because Motricity is a recent IPO. But looking deeper, investors can take heart that its primary competitor -- Amdocs -- is not only a slower grower on the revenue line, but also sports a 36% gross margin. The implication? Motricity isn't merely picking up scraps from an overflowing table. Rather, mCore fills a healthy niche in a valuable market.

Grade: Sustainable, but shaky
Which brings us back to the story. It's a good one in many respects. Global adoption of mobile data is on the rise, yet carriers can't handle all the traffic and services required to meet demand as well as they should. Motricity offers potent aspirin for this sort of pain.

Yet that may not be enough. An imperfect financial history suggests there are still issues for management to work through. I'm content to wait for better days because the opportunity is so huge, but I can't blame anyone who thinks this stock too risky to bet on. Most Fools appear to view Motricity as more dangerous than delectable.

Do you agree? Disagree? Let us know what you think about Motricity's products, strategy, and valuation using the comments box below. You can also ask me to evaluate a favorite growth story by sending me an email, or replying to me on Twitter. And in the meantime, keep tabs on Motricity by adding it to your watchlist for free, personalized stock tracking.