Are investors looking for the next domestic tech company to rise to the ranks of global leaders alongside ARM Holdings wise to look at Sage Group (LSE: SGE), Imagination Technologies Group (LSE: IMG), or Telit Communications (LSE: TCM)?
Shrinking revenues and profit warnings over the past year have hit Imagination Technologies hard. For the past half year revenues shrank by a full 13.5% and operating losses totalled £20.8m, doubling year-on-year. The near-term outlook for Imagination also looks poor as its reliance on Apple could send shares tumbling again this Tuesday when the company seems set to release financial statements showing a significant slowdown in iPhone sales.
Today’s update that the company may offload its Pure digital radio business as well as making cuts to capital and operating expenditures in order to shore up the balance sheet has sent shares up nearly 4%. However, much of the City’s bid up of shares seems to rest on the theory that Imagination will become a takeover target for a large customer such as Apple. Personally, I see this as a risky proposition for investors to make on a lossmaking company that is still priced quite highly.
Lagging the competition
Accounting and payroll provider Sage Group was one of the few bright spots on the FTSE 100 in 2015, ending the year up 18.5%. New management has hinted that the company may return to the heady pre-recession days of using frequent acquisitions to boost revenue, which has remained largely flat for the past five years. Alongside the possible use of debt-funded M&A, the company has set targets of 6% annual organic revenue growth and 27% operating margins. Hitting both these targets for the latest reporting period was well received by the City and viewed as proof that the company could grow even without acquisitions.
However, much of Sage’s future growth is already baked-in to current share prices, with the company trading at 30 times earnings. While Sage has recently put more emphasis on expanding its cloud-based offerings, it remains significantly behind competitors such as New Zealand-based Xero, which grew UK accounts by 67% and overall revenues by 67% in the past year. Highly valued, lacking the runaway growth prospects of a company such as Xero and a relatively low 2.36% yielding dividend mean I would favour other companies as a prospective long-term investment.
One to watch
Telit Communications’ year-end trading update released last Monday saw revenue increasing 13.4%, with pre-tax earnings set to be in the $40m-$45m range. The relatively small Internet of Things (IoT) focused company has been building out its services division to create recurring revenue streams rather than simply relying on designing and installing IoT devices in cars and industrial goods. This higher-margin services division still accounts for less than 8% of overall revenue, but grew 30% during the past year.
Telit is expected to book double-digit revenue growth and increased margins again this year and shares are currently trading at 11 times forecast earnings. With the founder still running the company, strong growth prospects and a relatively cheap valuation, I believe Telit is one share that long-term investors would do well to add to their watch lists.
Ian Pierce has no position in any shares mentioned. The Motley Fool UK owns shares of Imagination Technologies. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.