The stock market loves a good rags-to-riches story. Everyone’s seen the photo of Jeff Bezos sitting at a small desk in his garage with Amazon scribbled on the wall in blue marker.
Taken back in 1994, it’s become an iconic image of how a small home business can turn into a billion-dollar company. A mere three years later, Amazon went public with a share price of only 9c (when adjusting for stock splits). Twenty-seven years later, the stock’s up 190,000%. That’s a 32.2% return a year, on average.
Since then, the US tech industry’s exploded, with companies like Nvidia, AMD and SMCI achieving multi-billion dollar valuations.
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But the UK lags behind. Even our most promising tech darling, ARM, jumped ship for the green grass of the US. The likes of Darktrace, Softcat and Computacentre show promise — but I think a much smaller stock could be our next big thing.
Cerillion
A constituent of the smaller tech-focused AIM index, Cerillion‘s (LSE: CER) an upcoming £570m IT services company. At first glance, it appears to be little more than a managed services provider focusing on billing and charging.
But there’s a reason why it’s the top performer on the AIM index over the past five years, up 1,200%.
The company’s expertise in designing and implementing AI-enhanced multi-service communication systems has driven high demand. As an ex-IT industry professional, it looks to me like a company that should have a much higher valuation.
I won’t bore the non-tech readers with details but if it’s delivering as advertised (and reviews suggest it is) then I’m very bullish about its future.
Financials
Its earnings growth rate of 39%’s already double that of the UK software industry and not far off US tech giant Nvidia. In fact, the companies share several similarities. Both have high price-to-earnings (P/E) ratios and overvaluation estimates of 40-60%.
Earnings growth’s forecast to slow to 9.8% a year going forward, which could push up the P/E ratio even further. That might dampen investor sentiment.
Usually, that would make me question further growth. But Cerillion’s future return on equity (ROE) is forecast to be 30% in three years, with earnings per share (EPS) expected to grow 24% by 2027.
So I think it’s just getting started.
Risk/reward
Before I get too carried away, such stocks are usually more risky investments. With lower liquidity and a smaller market-cap, it takes less to move the price. Even something as small as a change in CEO can send things into a downward spiral.
Moreover, tech may be a high-growth industry but it’s also highly competitive. Cerillion’s by no means alone in this space and it’s smaller than many competitors. All it takes is one big player to come out with a similar idea and suddenly sales dry up.
So it’s an increased risk/reward situation.
Final thoughts
As is often the case in tech, ground-breaking companies outpace a market that’s slow to adopt new ideas. As such, Cerillion could be primed for a bright future.
With major US tech stocks looking increasingly overvalued, maybe it’s time to give some space to the little guys. I seldom find a small-cap stock with this much potential so I plan to buy the shares this month.
