Recurring revenue is a big part of the potential appeal of CentralNic Group (LSE: CNIC). This unusual internet company makes most of its money by selling subscriptions for domain names. Its speciality lies in so-called top-level domains (TLDs). These are the end part of a name, such as .uk or .com.

This market is changing and there are a growing number of non-geographic TLDs, such as .xyz, which is used by Google’s parent company Alphabet, among others. CentralNic’s growth proposition is that it has long-term contracts to manage and wholesale many of these TLDs. Today’s half-year results provide a chance for us to check on the firm’s progress.

Mixed results

Revenue rose by 19% to £10.6m during the first half, while adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) rose by 50% to £1.4m. However, an increase in acquisition-related charges, non-recurring costs and other non-cash charges meant that CentralNic’s adjusted pre-tax profit fell by 29% to £670m.

The group’s accounting is quite complex. But one positive measure from today’s results is that cash generation appears to remain healthy. Net cash rose slightly, from £7.5m at the end of 2016 to £7.7m at the end of June.

Management remains confident of meeting full-year expectations. This puts the stock on a forecast P/E of 15. The company doesn’t currently pay a dividend, but if cash generation remains positive, then this might change over the coming years.

I think CentralNic’s full-year results will provide us with a clearer picture of the firm’s progress towards being a recurring revenue business. In the meantime, I’d rate the stock as a speculative buy.

Is this setback just a blip?

Shares of marketing company System1 Group (LSE: SYS1) — formerly known as BrainJuicer — tripled in value between February 2016 and May this year. But they’ve since collapsed in spectacular fashion, falling from a 52-week high of 1,050p to just 557p at the time of writing.

This 50% drop came after the company issued a profit warning. Among the reasons cited were a 10% rise in organisational costs and deferred spending by clients. An extra worry was that competitive pressures were said to be increasing.

This concerns me, as my understanding was that the group’s services were quite innovative and unusual. If competitors are starting to offer similar services at lower prices, System1’s high profit margins could fall sharply.

Uncertain outlook

First-half profits are only expected to be “a little over break-even” this year. And although performance is expected to improve during the second half, the shares still look expensive to me. Broker forecasts put System1 stock on a forecast P/E of 18 for the current year, falling to 16.5 in 2018/19.

Although the company’s performance could spring back rapidly, it may not.  I’d prefer to avoid the risk of further losses, even if it means missing out on a potential recovery.

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With that in mind, here are two stocks which could be worth a closer look. While relatively high risk due in part to their size, their return potential could be significant.

Strong performance

Reporting on Tuesday was Value Cycle solutions provider for the US healthcare market, Craneware (LSE: CRW). It announced a trading update for its most recent financial year, with the company continuing its strong performance throughout the year. It expects to report revenue growth for the full year of 16%, with EBITDA (earnings before interest, tax, depreciation and amortisation) set to rise by over 13%.

The company reported its first product sales on its new cloud-based platform called Trisus. This could provide innovation to a healthcare industry which is striving to lower costs and improve efficiencies. Therefore, its growth potential may be significant over the long run, which is why Craneware is continuing to invest heavily in the platform. As well as this, its Cost Analytics solutions continue to bolster margins for customers, which in turn leads to improved patient outcomes.

Looking ahead, Craneware is expected to report a rise in its bottom line of 17% in its current financial year. This puts its shares on a price-to-earnings growth (PEG) ratio of 1.8, which suggests it could offer upside potential. With a relatively visible revenue outlook and improving financial performance, it would be unsurprising for its share price to perform well in the long run.

Improving business

Also offering upside potential is global domain name registry services provider CentralNic (LSE: CNIC). It has experienced a somewhat mixed recent period, with its bottom line being highly volatile. However, in the current year it is forecast to post a significant rise in profitability which is due to put its shares on a price-to-earnings (P/E) ratio of just 11.7. This could indicate they offer good value for money, which suggests they could benefit from an upward re-rating.

In recent years, CentralNic has sought to diversify its business model. This has helped to reduce its overall risk profile, while allowing it to access growth potential in a wider range of markets. The acquisition of Instra Group also helped to bolster its financial outlook at a time when a number of changes are taking place with regard to the domain industry. The business appears to be well-placed to capitalise on this evolution, which could make it a good time to buy it for the long term.

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