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Zoo Digital’s share price is up 450% in a year. Is it too late to buy now?

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Over the bank holiday weekend, I was looking at a list of the top-performing AIM stocks in 2018. There have been a number of high flyers this year, with best performer Tern rising almost 650%. Yet one company that caught my eye was Zoo Digital (LSE: ZOO), which is up around 150% year to date, 450% over 12 months, and by more than 2,000% over five years. So let’s take a closer look at the stock. What are investors excited about?

Growth story

Zoo Digital describes itself as a “leading provider of cloud-based subtitling, captioning, localisation and distribution services.” What that means in layman’s terms is that the group specialises in providing subtitling and dubbing services for content providers such as Netflix, which is a fast-growing market, given the rise in streaming services in recent years.

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While the company’s subtitling services have powered revenue growth up to now, its dubbing services also look very interesting as the group has developed an innovative cloud-based platform which enables functions such as auditioning, recording and editing to be performed remotely from anywhere in the world. This could potentially disrupt the industry and the group stated in its full-year results that its dubbing services have opened up a “significant new axis of growth for the company.” So the story certainly looks exciting. But are the shares a good investment right now?

For the year ended 31 March, Zoo generated revenues of $28m, up 73% on the year before. That’s certainly a positive. Yet at the same time, the group reported a pre-tax loss of $5m, which demonstrates that it’s still very much an early-stage company. Looking at analysts’ forecasts, profitability is expected to improve this year. But the estimated earnings figure of 1.9 cents per share places the stock on a forward P/E of over 100, meaning that it’s priced for perfection. At that valuation, I’m going to sit on the sidelines for now. I do like the growth story here, but I’ll be keeping the stock on my watchlist for the time being.

Better value growth stock?

One stock that potentially offers more value right now (and one that I own myself) is cybersecurity specialist NCC Group (LSE: NCC). The company has had its problems in recent years after trying to grow too quickly through acquisitions. However, things appear to have stabilised, and with analysts upgrading their earnings forecasts for the group, now could be a good time to take a closer look at the shares. 

Full-year results released in mid-July showed that NCC has recovered from its recent growth issues. For the year to 31 May, revenue from continuing operations increased 8.3% to £233.2m. Adjusted basic earnings per share rose to 8.3p, up 34% on last year’s figure of 6.2p per share. Net debt was also reduced to £27.8m, down from £43.7m the year before.

Looking ahead, analysts expect the group to generate earnings per share of 9.2p this year which, at the current share price, places the stock on a forward P/E of 23.8. In a world in which demand for cybersecurity services is only likely to rise, and growth opportunities vast, I think that valuation is a fair price to pay for the company.

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Edward Sheldon owns shares in NCC Group. The Motley Fool UK owns shares of NCC. 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.

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