Why this growth stock has 20%+ upside after beating expectations

Investors usually react positively to companies which are able to beat expectations. After all, the market accommodates projections and if they’re beaten, it means a higher valuation could be necessary. That seems to be the case today, with a relatively small technology company having announced its profitability for 2016 is now expected to be ahead of previous forecasts. Its shares are already up over 3% and could rise by another 20% over the medium term.

Improving performance

The company in question is solutions provider Accesso Technology Group (LSE: ACSO). It has reported that revenues for the 2016 financial year should be in line with expectations, but profitability is due to be higher than previous guidance. This strong performance has been achieved despite major and accelerated investment in product and infrastructure. This has been undertaken to support expansion into new geographies in order to expand long-term growth, while also investing in the recently launched Prism wearable device.

Upbeat outlook

In the current year, Accesso is forecast to record a rise in its bottom line of around 22%. In 2018, its earnings are due to rise by around 19%. This puts it on a price-to-earnings growth (PEG) of just 1.5, which seems fair given its long-term outlook. In fact, given the investment being made in the business in terms of new products and new geographies, it seems likely that its growth rate could remain at current levels over the medium term. In that case, it could realistically maintain its current valuation, which would mean a share price gain of 20% or more over the medium term.

Relative appeal

Of course, buying relatively small tech stocks such as Accesso can be somewhat risky. Clearly, they lack the size, scale and financial firepower of larger peers. However, they can also offer greater adaptability and a business model more responsive to changing consumer tastes and demand. In Accesso’s case, it seems to offer strong and consistent growth at a reasonable price, which can be hard to find within the tech sector.

For example, sector peer Iomart (LSE: IOM) is forecast to record a rise in its bottom line of 9% next year, followed by 2% in the following year. While this gives an average growth rate roughly in line with the wider index, the managed hosting and cloud services specialist trades on a price-to-earnings (P/E) ratio of 17.3. This equates to a PEG ratio of over three when combined with its forecast growth rate. That’s double the PEG ratio of Accesso, which indicates Iomart could be outperformed by its sector peer.

Clearly, Iomart is a high-quality business. However, due to its share price rise of 120% in the last five years, it now seems to be fully valued. Accesso still appears to have 20-plus upside, which makes it the better buy at the present time.

But is this an even better growth stock?

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