If I had bought Gresham Technologies (LSE: GHT) stock some 10 years ago, it would have been a penny stock then. And it would have been exactly the kind of penny stock an investor like me would like to buy. Its share price has exploded over the years. By now, I would have more than tripled my money on it.
Greater visibility on revenues
And going by some of the latest developments for the company, I am hopeful that it can continue to be a rewarding stock to buy and hold for a long time. Its biggest client, Australia and New Zealand Banking Group, better known by its abbreviation and ticker as simply ANZ, has just renewed its contract with the company. It says that this will “materially increase its investment” in it.
It specifically mentions its software Clareti in this context, that software being used to conduct banking transactions in a scalable and safe way. The platform’s revenues from ANZ alone are expected to increase by 35% during the year. This is significant, because Clareti accounts for the lion’s share of the company’s total revenues.
Healthy results for Gresham Technologies
This builds on its already healthy results for the first half of 2021. Gresham Technologies’ revenues grew by 19% and its adjusted earnings before interest, taxes, amortisation and depreciation, better known as EBITDA, grew by 17%.
These numbers are encouraging, but I think it is important to highlight that it reported a net loss in the latest update. This was on account of its acquisition of Electra, which is another software provider that caters predominantly to US-based buy-side companies. For that reason, this was not a loss due to a recurring cost. And going by the expected improvement in its revenues this year, I think it is reasonable to expect that it can still post a profit for the year. In fact, in the past years, it has indeed been profitable.
Small stocks and the liquidity problem
A less easily reconciled challenge when considering whether to buy the stock or not, is its size. As a small company, with a market capitalisation of less than £150m, there are relatively few transactions in the stock on a daily basis. As a result, if I would like to sell the stock, there is no guarantee that I will find buyers as quickly as desirable.
Is this a stock to buy?
But then again, going by the company’s past financials and its share price movements, this is a stock for the long term. There is potential to make quick capital gains from it, for sure. But I doubt if that will really give me the doubling or tripling in capital that can happen if I hold it for a long enough time. And if it continues to grow over the next decade as well, I reckon that it would be a far more liquid stock by then as well. It is a buy for me.
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Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.