The Motley Fool

After falling 40%, is this FTSE 100 stock a bargain?

Image source: Getty Images.

Shares in Micro Focus (LSE: MCRO) have taken a hammering over the past 12 months. The company, which is one of the largest tech firms in the UK, has struggled to integrate a significant acquisition and, as a result, has issued one serious profit warning that has sent investors running for the hills. 

Since the beginning of the year, shares in the company have fallen by around 40%, excluding dividends.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

After these declines, value hunters might be tempted to buy into Micro Focus. But is the stock really a bargain?

Worth buying?

After recent declines, shares in Micro Focus do look cheap. They’re trading at a forward earnings multiple of just 10.5, at the time of writing. Usually, this discount valuation would attract me to any business, especially because shares in this FTSE 100 tech darling are trading at a significant discount to the rest of the UK Software and IT Services Industry (trading at a P/E of 17.7).

However, I’m worried about what the future holds for the business. Management has struggled to integrate the company’s largest acquisition ever over the past year, which is concerning because Micro Focus’ primary line of business is combining and bringing old software systems up to date. The profit warning doesn’t, in my view, bode well for future growth. 

The deal also lumped the enlarged company with a mountain of debt ($4.5bn), which will take some time to pay down. Even though City analysts are expecting the group to report earnings growth of 56% for 2018 and a net profit of $857m, I want to see some concrete evidence that growth has returned before supporting this struggling enterprise.

In the meantime, I think small-cap GB (LSE: GBG) deserves a place in your portfolio.

Specialist business 

At first glance, compared to Micro Focus, shares in this company don’t seem particularly attractive because they’re changing hands for around 30 times fiscal 2019 earnings. However, unlike Mirco Focus, GB is growing rapidly and has a large, growing mountain of cash on its balance sheet.

The company’s half-year report, which was published this morning, revealed revenue growth of 9% year-on-year and the firm expects to hit City forecasts for the full-year, based on current trading. Analysts are currently projecting a net profit of £22.4m for fiscal 2019, more than double last year’s figure.

As I noted last time I covered the stock, one of the reasons why I think GB could be a fantastic growth investment is because the company is carving out a niche for itself in the data security business, an industry that’s only going to grow in size as the world becomes ever-more connected. What’s more, GB has high levels of recurring revenue and steadily improving margins, which I think are highly desirable qualities in any business. 

With this being the case, even though the stock might look a little pricey, I think it’s worth buying today.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Micro Focus. 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.