Today I’m looking at two small-cap growth stocks in the technology sector. Both firms operate in areas where I expect demand to surge over the coming years.
Unfortunately this doesn’t guarantee that they will be profitable for shareholders. This is why I’d only buy one of these stocks today.
Within sight of success?
Australian firm Seeing Machines (LSE: SEE) built its reputation by developing driver monitoring systems for giant mining trucks. These systems were successful at detecting drowsy drivers and reducing crashes due to fatigue, but the mining market is relatively small and specialised.
The company needed a large-scale move into the on-road truck fleet market to achieve profitable scale, and this is taking time. One of the problems facing the firm is that the costs of developing its technology appear to be quite high.
Today’s interim results provide a taste of the problem. Although revenue for the six months to 31 December rose by 267% to A$14.7m, the group’s operating costs rose by 55% to A$23m. As a result, losses for the period increased from $14.1m to A$16.7m.
The picture isn’t clear to me
In fairness, some of this increased loss was the result of an inventory build-up of its Guardian fleet product ahead of deliveries during the early part of 2018. Seeing Machines does expect a stronger financial performance during the second half of the year.
But the firm has confirmed that its full-year performance is expected to be in line with market expectations, which are for a loss of A$29.7m.
Why I’d sell
This stock has risen by about 65% since October, when management issued a bullish statement suggesting sales could rise from A$13.6m in 2016/17 to about $80m in 2018/19. Strong fleet and automotive revenues are expected to drive this growth.
On the strength of this, the firm raised £35m (A$62m) in a share placing in December. The group is now well funded, but there’s no guarantee it will have enough cash to reach profitability.
Indeed, it’s not clear to me when Seeing Machines will become profitable. That’s why I’d use the current price strength as an opportunity to sell.
Profitable analytics
One high-tech stock I am keen on is Oxford Metrics (LSE: OMG). This software group makes “analytics software for motion measurement and infrastructure asset management”. Activities include road management, medical analysis and Hollywood special effects.
This is a profitable business. Sales rose by 10.7% to £29.2m last year, generating a pre-tax profit of £3.7m. Although this was lower than the £5.1m figure reported one year earlier, this was largely due to investment in the business.
The group generated £2.3m of free cash flow last year and paid dividends of £1.2m, resulting in an increased year-end net cash balance of £9.8m.
Why I’d still buy
These shares have risen since I bought them for my portfolio. They now trade on a forecast P/E of 20 for the current year.
However, earnings per share are expected to rise by a hefty 37% in 2018/19, as recent investment bears fruit. This gives the stock a 2019 forecast P/E of 15, which I think is affordable for a growth business.
In the meantime, there’s a useful 2.1% yield, backed by a substantial cash pile. I continue to rate this stock as a buy.
