Foreign-based AIM small-caps often suffer from a lack of trust among UK investors. But is that surprising? Just look at what happened to Internet of Things manufacturer Telit Communications (LSE: TCM) recently. Investors were already sceptical of the Israel-based company’s accounts, due to the large amounts of expenses it was capitalising. Product delays had further dented sentiment towards the stock.
However in August, Italian newspaper Il Fatto Quotidiano reported that CEO Oozi Cats was in fact a fugitive who had fled the US back in the early 1990s after being indicted for fraud. Telit hired a law firm to investigate its CEO, resulting in a 33% fall in the company’s share price. While the stock has recovered somewhat from its August lows, it’s still down around 50% from the 370p mark it was trading at in May.
Taptica InternationalÂ
Turning to another Israel-based tech company, Taptica International (LSE: TAP) has seen its share price decline recently too. The £214m market cap company, which offers artificial intelligence-based solutions for mobile advertising and counts Amazon, Facebook and Disney among its customers, has seen its share price fall from 440p in July to as low as 325p in recent weeks. Investors have been concerned that Apple’s new Adblock will cause problems for mobile advertisers. Could the stock be heading for a Telit-style collapse?
Taptica released half-year results this morning and the market appears to be impressed with the numbers. Indeed, the stock is up 10% as I write. Revenue for the half year increased 27% to $65.6m and adjusted EBITDA rose 42% to $13.1m. Net cash from operating activities was strong at $13.7m, resulting in a cash balance of $32.6m at 30 June, up from $21.5m at the end of December. Interestingly, Taptica said it welcomes the browser changes due to be implemented with Apple’s iOS11. The tech firm believes the changes represent an opportunity for the company, as it anticipates greater demand for its services related to in-app marketing.
With earnings of $0.38 forecast for FY2017, Taptica currently trades on a forward P/E ratio of 13.4. Given that many other UK-based smaller companies exhibiting similar growth are currently trading with P/E ratios in the 20s, the valuation is cheap. However, it suggests to me that the market is still a little hesitant about the company.
Safer to stick to the UK?
With that in mind, perhaps it’s a sensible idea to stick to UK-based tech stocks. One such stock that I like is Softcat (LSE: SCT). The FTSE 250-listed IT infrastructure specialist provides organisations with datacenter, business intelligence, cloud, networking and security solutions. It’s worth noting that Neil Woodford is an owner of the stock.
After enjoying a strong share price rise from 300p to 450p between January and May, the stock has retreated a little recently and now trades just over the 400p mark. I believe the pullback may have created a good buying opportunity.
Revenue is forecast to increase 19% this year, and analysts expect a dividend payout of 13.6p, which equates to a yield of 3.3% at the current share price. A forward looking P/E ratio of 20.2 looks fair to me and suggests the market acknowledges the growth story here, but has not got carried away with the valuation. Look out for full-year results on 18 October.