Small-cap tech company Ideagen (LSE: IDEA) this morning released a positive trading update. It shows that the information management software supplier has made good progress in the six months to 31 October. However, does it have what it takes to be the next big thing?
Ideagen’s sales and adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) are expected to show a significant increase versus the same period of last year. This is partly because of the acquisition of Covalent, but it is also due to organic growth. Ideagen’s sales are expected to have risen by 16% on an organic basis, with a small contribution on top from Covalent following its acquisition in August.
Considerable growth potential
Ideagen’s cash generation during the period was strong and it maintains a sound balance sheet that contains no debt. The cash balance at the end of the period was £4.8m following the £3.8m payment for acquisitions and associated costs. The integration of Covalent is now complete and an increased contribution is expected in the second half of the year.
In the long run, Ideagen has considerable growth potential. For example, its cloud-based Enlighten solution offers a major market opportunity which Ideagen should be able to capitalise on. In the near term, its bottom line is due to rise by 12% in the current year and by a further 13% next year. Despite this upbeat outlook, Ideagen trades on a price-to-earnings growth (PEG) ratio of only 1.2. This indicates that it offers a wide margin of safety should its performance fail to meet guidance. It also means that Ideagen’s capital gain potential is high.
A more stable outlook
Of course, Ideagen is a relatively small company which continues to offer a relatively high risk profile. Therefore, more risk averse investors may prefer to buy a company which has a longer track record of profitability and that offers a more stable outlook. Within the tech space, Micro Focus (LSE: MCRO) offers a potent mix of stability as well as growth potential.
For example, Micro Focus’ merger with HPE should lead to considerable synergies as well as a more stable business. This could lead to improved cash flow and higher dividend payments, which could make Micro Focus a highly appealing income stock. It already yields 2.8% from a dividend which is covered 2.3 times by profit, so the dividend growth potential is considerable. And with Micro Focus having a robust balance sheet, its risk is relatively low.
However, in terms of which company could become the next big thing, I think Ideagen has more potential. Certainly, it is far riskier than Micro Focus due to its smaller size. But with a sound business model, bright growth prospects and a low valuation, Ideagen could deliver stunning capital gains over the medium to long term.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Micro Focus. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.