Shares in digital services company Kainos (LSE: KNOS) jumped 12% in early deals this morning after the firm issued a trading update saying that it is on track to smash City growth expectations for the full year.
The question is, with earnings exploding, is now the time to buy this high-tech growth play?
Time running out?
After a strong start to 2018, Kainos now expects its numbers for the year ending 31 March 2019 to be “ahead of current market expectations.” As City analysts had been expecting the company to report earnings per share (EPS) growth for 2018 of a staggering 31% before the release, it’s not surprising the market has reacted positively to the update confirming that the business will beat City expectations.
Kainos provides tailored digital solutions to the public and private sector to help enterprises better manage their operations. It has some big-name clients, including the UK Home Office, Primark and Diageo. One of its primary offerings is services related to the Workday human resources management platform. Here Kainos aims to use its digital experience to produce bespoke human resource management solutions for customers.
All of the above indicates to me that Kainos has an extremely defensive business model. Producing tailored software systems for clients virtually guarantees the client will remain with the business, locking in potentially many years of recurring revenue for the firm. Using this approach, the company has been able to grow revenue at a compound annual rate of 26% since 2013. Net profit has expanded at a compound annual rate of 27%.
I reckon this is just the start of its growth story. With revenues of £113m predicted for 2019, Kainos is still small-fry in the global tech business. There is a multi-billion pound market out there for the group to capture.
With this being the case, even with the stock trading higher by 12% at the time of writing, I think the shares could increase significantly in value over the next five to 10 years. The company has tremendous blue-sky potential.
NCC (LSE: NCC) is another IT sector growth stock I believe could produce huge returns for shareholders. NCC operates in one of the hottest sections of the tech market today, cybersecurity.
Hackers and criminal gangs looking to take advantage of weaknesses in computer systems are getting smarter every day, and it is a race for companies such as NCC to stay ahead. Analysts estimate the size of the global cybersecurity market could hit $230bn by 2022, up from $75bn in 2015. It is unlikely to stop there. The market will likely continue growing exponentially as tech continues to dominate our everyday lives.
With revenues of just £255m predicted for 2019, NCC is another a small fish in a massive pond. Fiscal 2017 and 2018 were mixed years for the company. Revenue continued to grow, but the firm was forced to report a loss and commissioned a strategic review as it tried to run before it could walk.
Analysts are expecting a full recovery in 2018 with EPS growth of 151% targeted. Further, EPS growth of 15% is slated for 2020. Based on these estimates the stock is changing hands at 23 times forward earnings. Despite the firm’s troubles last year, I believe this multiple is justifiable considering the size of NCC’s potential market.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK owns shares of NCC. The Motley Fool UK has recommended Diageo. 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.