Shares in cellular materials technology company Zotefoams (LSE: ZOTE) jumped 17% in early trading after the small-cap announced a mouthwatering strategic partnership with US sports giant Nike.
In addition to collaborating on developing footwear technology, the Croydon-based business has agreed to supply the $100bn cap firm with its “high-performance foam materials“. These — the former claims — are not only superior “in performance, consistency, quality and purity” to those produced through alternative methods, but can also be formulated to client specifications.
Today’s hugely encouraging news builds on the positive trading update released by the company at the start of November.
Back then, it was announced that group revenue had been 22% higher in Q3 than over the same period in 2016 (and 24% ahead over the first nine months of 2017) as a result of “strong organic growth across all business units“. Sales rose 16% over the quarter once currency fluctuations had been taken into account.
Thanks to this excellent performance and a bulging order book, full-year revenues at Zotefoams are now likely to come in ahead of market expectations. Adjusted profit before tax and exceptional items is also forecast to be at “the top end of the range” of analyst predictions.
Taking today’s rise into account, Zotefoams’ share price is 92% up from exactly one year ago. As you might expect, that means the stock isn’t quite the bargain it once was. A forecast price-to-earnings (P/E) ratio of 26 for the full year certainly leaves little room for error.
Nevertheless, this morning’s news — combined with the firm’s strategy of increasing investment in new equipment with the intention of becoming a global leader in what it does — suggests to me that it is still worthy of serious consideration by growth-focused Fools.
Also announcing news today was £900m cap technical services provider Keywords Studios (LSE: KWS) — one of the standout performers of the junior market in 2017.
Acquisition-friendly Keywords informed investors that it had purchased game development, art creation and software engineering firm Sperasoft for $27m as part of its ongoing strategy to “selectively consolidate the highly fragmented market for video games services.” Funded from a combination of existing resources and equity, this new addition to the Dublin-based firm’s portfolio is expected to be earnings enhancing in the first year.
A quick scan of Sperasoft’s recent performance goes some way to explaining why Keywords was so keen to take the US-headquartered company under its wing.
Thirteen years after its inception, the company employs 400 members of staff and boasts production studios in Russia and Poland. In 2016, it achieved revenues of $16m — 54% higher than in 2015. This number is expected to grow to roughly $20m in the current year, with underlying adjusted EBITDA of $2m. Sperasoft’s enviable list of clients includes Electronic Arts (developer and publisher of top sporting titles including Fifa), Ubisoft (maker of newly-released Assassin’s Creed: Origins), Warner Bros and Riot Games.
Trading on a nosebleed-inducing valuation of 58 times earnings for the current year (reducing to 41 in 2018 if earnings growth estimates are hit), Keywords is clearly priced to perfection.
That said, with the popularity of gaming showing no signs of slowing and the company quickly establishing itself as the global go-to destination for services in the industry, I still regard it as an exception to the rule that hyper-expensive stocks are simply too risky to be worth bothering with.
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Paul Summers owns shares in Keyword Studios. The Motley Fool UK has recommended Keywords Studios. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.