Despite all the concerns about an AI bubble, Nvidia stock has still managed to more than double the S&P 500‘s return over the past year. Looking ahead to the next 12 months, however, analysts see more price appreciation potential in Beeks Financial Cloud (LSE:BKS).
This UK small-cap stock has dropped 30% since February. Now at 223p, it sits nearly 50% below an average share price target of 335p set by two City analysts.
Here, I’ll explain why I recently started a small position in the stock, and why I reckon it’s worth a look.
Under the radar
Founded in 2011, Beeks currently has a £150m market cap, so it’s still quite a small business. Compared to Leviathan-like Nvidia, with its mighty $4.3trn market cap, Beeks is a stickleback!
So, what does it do? The firm provides cloud computing and connectivity services for financial markets. It offers secure, low-latency infrastructure that allows firms, banks, and exchanges to run algorithmic trading systems closer to financial hubs.
In short, Beeks helps financial institutions operate faster and more efficiently by hosting their trading and data systems in the cloud rather than on their own servers. This taps into the long-term trend towards more cloud computing in financial services.
The company has 22 data centres in key locations worldwide, with more than 1,000 financial enterprise clients. Blue-chip customers already include stock exchanges in Australia, Mexico, Toronto, and Johannesburg, as well as leading crypto exchange Kraken.
Attractive qualities
There are a few things I like here from an investing standpoint. For starters, Beeks is growing quickly in a niche market, with revenue increasing 26% to £35.9m for the year ended 30 June.
There’s growing market adoption of its Proximity and Exchange clouds. The former lets brokerages and fintech firms run their own private trading cloud, while the latter hosts trading systems directly inside major exchanges.
Another attractive feature for me is that Beeks is profitable, with low levels of debt. Last year, gross profit was up 30% to £14.7m, while underlying pre-tax profit jumped 41% to £5.5m. Essentially all of its revenue is recurring.
The company is also led by founder-CEO Gordon McArthur. I prefer smaller firms to be led by founders, as they tend to make decisions based on the long term, which aligns with my own investing mindset.
Finally, I like the valuation here. Going on forecasts for the current fiscal year, the stock is trading at 26 times forward earnings. This then falls to 21 times by next year.
Final thoughts
As with any investment, there are risks. One issue I have is that the level of profitability isn’t that impressive yet, especially for a technology company. The operating margin is below 8% and the return on capital is quite low. So a setback could pull the firm back into the red.
This is something I expect to improve, though. As Beeks notes: “We have invested in our core infrastructure so that we can scale the business significantly on our current operational asset base.”
Again, I’ve only taken a small position here. But I’m encouraged that the sales pipeline is at a record high, with multiple opportunities, including several top global financial institutions.
Taking a five-year view, I reckon this £2 stock has potential to outperform the market and is worth considering.
