Earlier this month, I named my top UK small-cap growth stocks for 2020. Digital marketing group dotdigital (LSE: DOTD), which specialises in artificial intelligence-fused SaaS (software as a service) marketing solutions, was one of the stocks that made the list.
At the time, DOTD shares were trading for 96p. Since then, they’ve surged to 112.5p, meaning they’ve climbed about 17% in less than three weeks. Here, I’ll look at why the shares have jumped recently and explain why I believe they have the potential to keep rising.
Excellent trading update
One reason DOTD’s share price has increased (it’s up 6% today) is that the company released an excellent trading update this morning, ahead of its half-year results for the six-month period to 31 December.
There’s a lot to like about today’s update. Here are some of the highlights:
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For the period, organic revenue from continuing operations rose approximately 15% to £23.1m, while recurring revenues from enhanced product functionality increased 32% to £7.4m.
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International growth was strong. In the US, revenue grew 18% to $5.1m, while in the APAC region, revenue increased 51% to AU$2.5m. Overall, international sales increased to 34% of total sales from 30% last year.
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Average revenue per customer was up 14% to £999 per month, driven by “an increase in existing client spend and new customers taking a wider array of modules and channels”.
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The company ended the year with a healthy cash balance of £22.5m (H1 2019: £16.6m).
It’s also worth highlighting the upbeat statement from CEO Milan Patel (note the phrases I’ve highlighted in bold):
Looking forwards, the market opportunity remains substantial, with a growing number of brands recognising the critical value of harnessing customer data and insights to create personalised, omnichannel marketing campaigns. Against this backdrop, and with a robust strategy and business model, powerful technology platform and highly talented team in place, we find ourselves in our strongest position to date, and are confident of continuing to build on the momentum in the business as we move into the second half.
Overall, this is a great update and management sounds very confident about the future, which I see as a bullish signal.
New chair
Another reason the shares have climbed this year is that last week the group appointed a new non-executive chair. The new chair, Michael O’Leary, brings a wealth of experience to the company as his career spans over 30 years working with AIM-listed, FTSE 250, and FTSE 100 companies, with a focus on the tech sector. This looks to be a good appointment.
Potential for further gains
Can the stock keep rising from here? Well, after the 17% share price rise, dotdigital shares are obviously not as cheap as they were at the start of the year. However, to my mind, the current valuation still offers room for growth.
With analysts forecasting earnings per share of 4.04p (this looks very achievable given that earnings last year were 3.88p), the forward-looking price-to-earnings ratio is 27.8. When you consider the stock’s high-quality attributes (high return on equity, low debt, solid track record of dividend growth) and the fact that many tech stocks currently sport P/E ratios in the 30s, I believe this valuation is quite reasonable.
All things considered, I see an exciting growth story here. As dotdigital continues to grow, I expect the share price to keep rising.
