The world’s greatest investor Warren Buffett often talks about the importance of the ‘business moat’ and while Buffett has never actually explained what he means by this, it is widely believed that his ‘moat’ is code for competitive advantage.
Competitive advantages can take many different forms, from a world-leading brand to sheer scale, they all accomplish the same aim of giving a particular business an edge over its peers, which will allow it to generate excess returns.
One competitive advantage that is becoming increasingly important is data. Big data is a multi-trillion dollar industry, and while anyone can enter the market relatively easily, it takes time to build a comprehensive dataset that gives the best results. Companies like Google and Experian are prime examples. Both have a leading position in their markets for data and are able to achieve market-beating returns on capital.
Upcoming data champion
Small-cap marketing firm Taptica International (LSE: TAP) is an upcoming data champion.
It uses data and machine learning to put its clients’ ads in front of the customers who are most likely to buy. The firm is active in the rapidly growing mobile ads market, where advertisers are keen to expand their presence.
And the company has signed up some big names with the likes of Amazon, Disney, Facebook, Twitter and Expedia all working with the group.
The numbers speak for themselves here. For the year ending 31 December 2016, the company reported revenue of $126m, up from $76m the prior year, growth of 66%. Gross profit leapt from $21m to $46m, growth of 119%. Even though costs increased by 44%, profit from operations surged by 566% from $3m to $20m. The majority of this profit was converted into cash. Operating cash flow during the period was $20m and after spending on dividends and buybacks, the company’s cash balance grew by more than 100% to $21.5m at the end of the year.
This growth is extremely impressive, there’s no other way of putting it, and City analysts expect growth and cash generation to continue for the foreseeable future. For 2017, analysts have pencilled-in earnings per share growth of 29% and growth of 7% is expected for 2018 as revenue rises to $145m.
Cash cow
Based on the projected growth rates above, shares in Taptica currently trade at a forward P/E of 12.9, which seems exceptionally cheap considering the group’s lofty earnings growth. What’s more, if you strip out cash of 34p per share, on a cash adjusted basis the P/E falls to 11.5.
As well as its data trove, it’s Taptica’s cash generation that is attractive. Last year the company returned around $12m to shareholders via dividends and stock buybacks. The shares currently yield 1.7% and the buybacks should only accelerate earnings growth, increasing value for shareholders.
So overall, if you’re looking for a highly cash generative, undervalued small-cap with a bright long-term outlook thanks to a strong competitive advantage, Taptica might be perfect for you.
