The Motley Fool

Why has Trakm8 Holdings plc slumped by a third today?

Telematics and data insight provider Trakm8 (LSE: TRAK) has released half-year results today. They have caused the company’s share price to fall by around a third, and it would be unsurprising for further declines to take place over the short term. However, could this provide a buying opportunity for long term investors? Or, is Trakm8 a stock to avoid?

Trakm8’s sales rose by 12% in the first half of the year, although its operating profit declined by 61% versus the same period of the prior year. It was negatively impacted by a significantly higher investment in sales, marketing and engineering resource. This amount totalled £1.5m, with Trakm8’s cash flow also being impacted by lower profitability as well as an ongoing move to the software as a service (SaaS) financial model.

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Looking ahead, Trakm8’s financial performance for the second half of the year is highly uncertain. The outcome for the full year is highly dependent upon the timing and quantum of contract opportunities, as well as the impact of foreign exchange rate movements. The company has also identified a risk in terms of contracts having the potential to drift into the next financial year. This would cause profits to be broadly in-line with last year on higher sales figures.

Of course, Trakm8 continues to make good progress with its strategy. For example, it has announced a new contract win today with Smart Driver Club and has its largest ever pipeline of substantial new contracts in place. Furthermore, the investment it is making today in its sales, marketing and engineering resources could improve its financial performance and help to reverse the decline in investor sentiment seen today.

In fact, Trakm8 is expected to deliver a rise in earnings of 15% in the 2018 financial year. This puts it on a price-to-earnings growth (PEG) ratio of just 0.7, which indicates that now could be a good time to buy it. While share price falls may be on the cards in the short run, Trakm8 could deliver high returns for patient, long term investors.

Despite this, Trakm8 remains a relatively high risk technology company. Therefore, more risk averse investors may prefer to buy a better diversified, more financially sound technology company such as Micro Focus (LSE: MCRO). It has increased its bottom line at an annualised rate of 22.5% during the last five years. This has allowed Micro Focus to raise dividends per share by 127% during the same time period.

There is more potential for dividend rises in future years, since Micro Focus currently pays out just 44% of profit as a dividend. Therefore, while its dividend yield of 2.8% is relatively low, it is likely to rise in future years. This provides evidence of its financial strength and stability, with the acquisition of HPE adding to Micro Focus’s long term profit potential. As such, and while Trakm8 has clear growth potential which makes a worthwhile buy, Micro Focus offers lower risk and high potential rewards.

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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.