The Motley Fool

Will this growth stock soar after profit beats expectations?

Software solutions provider Fusionex (LSE: FXI) has soared by 17% today after releasing a positive update. It shows that the company’s profit is due to beat expectations. But is it too late to buy it for the long term?

Fusionex’s trading update covers the year to 30 September. It shows that the company has continued to deliver on its strategy and has made strong progress following a positive first half of the year. In particular, Fusionex has successfully launched the next generation of its proprietary Big Data Analytics (BDA) platform, GIANT 2016. It has also provided blue-chip enterprise organisations with BDA software, with GIANT 2016 opening up a new addressable market across small and medium-sized businesses.

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As a result, Fusionex believes that while revenue will be in line with market expectations, EBITDA (earnings before interest, tax, depreciation and amortisation) will be significantly ahead of market expectations. This has significantly boosted investor sentiment in Fusionex and has sent its shares 17% higher today.

Looking ahead, more capital gains could be on the horizon. Fusionex expects the positive momentum of 2016 to continue into 2017, which could mean further improvements in its financial performance. Therefore, buying it now for the long term could be a sound move.

Of course, Fusionex is a relatively small business which, while profitable at the EBITDA level, isn’t due to record a black bottom line over the next couple of years. In fact, its pre-tax loss is forecast to be £0.6m in the current year. As such, Fusionex remains relatively risky compared to a number of its sector peers.

Less risk?

For example, information solutions provider Fidessa (LSE: FDSA) is expected to grow its bottom line by 8% in the current year and by a further 7% next year. This is slightly ahead of the expected growth rate for the wider market and when combined with Fidessa’s relatively stable and consistent business model, means that the company has long-term appeal.

Furthermore, Fidessa has a yield of 3.7%. This is much higher than Fusionex’s 0.7% yield. Although Fidessa’s dividend is set to be covered just 1.1 times by profit next year, the robust nature of its financial performance in recent years shows that its dividend should be relatively secure. That’s especially the case as Fidessa’s profit growth prospects mean its dividend headroom should increase over the medium term.

However, Fidessa lacks the long-term growth potential of Fusionex. Therefore, investors who are less risk-averse and who are seeking high potential rewards may prefer to buy Fusionex. But for many investors the relative stability, superior income visibility and high yield make Fidessa the better option for the long term. That’s especially the case since the outlook for the global economy remains uncertain, which could make the market more risk-averse and favour more stable companies such as Fidessa.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Fidessa. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.