Two niche tech stocks that I think could smash the FTSE 100 over the next five years

Looking for growth stocks that can outperform the FTSE 100 (INDEXFTSE: UKX) index? Check out these under-the-radar stocks, says Edward Sheldon.

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The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

It’s often said data is the new oil. Almost all companies today generate some form of data, and if they can process this effectively, they can use it to gain valuable insights which can lead to higher revenues and profits. Many believe therefore that data is to the digital economy what oil was to the industrial economy.

With that in mind, today I want to highlight two niche UK companies that specialise in helping other companies with their data requirements. Given the powerful growth of the data management industry, I believe both companies are well positioned to enjoy strong growth in the years ahead.

First Derivatives

First Derivatives (LSE: FDP) is a global technology provider with more than 20 years’ experience in the data industry. A ‘big data’ specialist, the group works with some of the world’s leading financial institutions, energy companies, and technology organisations to help them process their data more effectively. Its key product, Kx, which offers the high-speed processing of real-time, streaming and historical data, is used by a number of prominent companies including Airbus, Deutsche Bank, and Aston Martin Red Bull Racing.

First Derivatives has grown significantly in recent years, and full-year results for the year ended 28 February, released this morning, show another year of strong progress. For the 12-month period, revenue jumped 17% to £217.4m, while adjusted fully-diluted earnings per share climbed 15% to 83.2p. Both figures topped consensus forecasts and, as a result, the shares have jumped 3.5% this morning.

Chairman Seamus Keating was also upbeat about the group’s prospects, stating: “As we look ahead, we are excited by the growing pipeline of opportunity across our business and are confident of achieving another year of strong organic growth.”

First Derivatives isn’t a particularly cheap stock at the moment, not surprising given the growth rate of the big data industry. Currently, the shares trade on a lofty forward-looking P/E ratio of around 35. That said, the shares have undergone a significant correction over the last year, meaning the stock is considerably cheaper than it has been. I see it as a long-term ‘buy’ at current levels.

D4T4 Solutions

Another data-focused stock I think looks very interesting is D4T4 Solutions (LSE: D4T4), which was formerly known as IS Solutions. Specialising in comprehensive platforms that enable customers to get the most out of their data, its customers include HSBC, the NHS, and Qantas Airlines.

Like First Derivatives, D4T4 has grown significantly in recent years and has strong momentum right now. For example, in a trading update last month, the company advised that adjusted profit for the year ending 31 March is expected to be ahead of market expectations and noted it has an encouraging pipeline and opportunities ahead.

D4T4 appears to have many attributes of a quality investment. The company operates in a high-growth industry and revenue and earnings are on the rise. Profitability is high, with return on equity (ROE) averaging 21% over the last three years.

Moreover, cash generation is robust and debt is low. With the stock trading on a P/E ratio of a reasonable 19.3, I think there’s considerable upside potential here. This is another ‘buy’, in my view.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Edward Sheldon owns shares in First Derivatives. The Motley Fool UK has recommended HSBC Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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