This super small-cap could beat Purplebricks Group plc

Roland Head explains why he’d prefer this small upstart to online star Purplebricks Group plc (LON:PURP).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Today I’m going to look at a small-cap stock with a market cap of £27m. This puts it below the radar for most fund managers, but makes it potentially attractive for active small-cap investors.

The company in question is Sopheon (LSE: SPE), which provides software to help companies manage innovation and product development. The firm’s client list includes blue-chip names such as PepsiCo, Proctor & Gamble and pharmaceutical giant Merck. So it seems to be a fairly credible business.

Sopheon’s revenue rose by 11% to $23.2m in 2016, while pre-tax profit rose by 125% to $2.7m. This dramatic increase was mostly down to a reduction in research, development and administrative costs, which fell from $7.1m in 2015 to $6.4m in 2016.

The company issued an upbeat AGM statement today. So far this year, 20 licence orders have been received, up from 14 at the same point last year. Revenue visibility for the full year is currently $17.5m, up from “just under $17m” last year. These figures suggest to me that the strong momentum seen last year is continuing, although revenue per licence may still be falling — a trend the company reported in 2016.

Sopheon ended last year with net cash of $4.2m, so debt doesn’t seem to be a problem. However, one risk facing shareholders is the prospect of serious dilution if £2m of convertible loans (due in 2019) are turned into shares. Doing so would increase the share count by 2.6m, or about 35%, effectively reducing earnings per share by about 26%.

For this reason, I’d argue that with a forecast P/E of 15 for 2017, Sopheon is fairly valued at present. I’d hold at current levels.

Will this disrupter make it big?

Shares of online estate agent Purplebricks Group (LSE: PURP) are worth 255% more than they were one year ago. Annual sales have risen from £3.39m in 2015 to a forecast level of £43m for the year ended 30 April 2017.

Encouragingly, the group’s UK business is expected to report a full-year adjusted EBITDA profit this year. The firm’s strong growth is expected to continue, but it’s worth noting that Purplebricks shares now trade on a price-to-sales ratio of 40. That’s astonishingly high, especially for a lossmaking business.

Investors are clearly pricing-in a dramatic increase in sales and profits in the future. One of the main reasons for this is the recently announced plan to expand into the US market. If successful, this could open the door to a market many times bigger than the UK.

However, gaining market share in the US — in the face of growing competition — is unlikely to be easy. Even if Purplebricks is eventually successful, I wouldn’t be surprised to see the group’s share price take a sharp step backwards at some point.

In my view, the valuation could take a sharp knock if market sentiment changes or if overseas growth is slower than expected.

For what it’s worth, I think it’s a good business that could be worth more at some point in the future. But I suspect shareholders will have a rocky ride. I believe a very long-term view will be needed to have any chance of making a profit from current levels.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended PepsiCo. 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.

More on Investing Articles

Investing Articles

After it crashed 25%, should I buy this former stock market darling in my Stocks and Shares ISA?

Harvey Jones has a big hole in his Stocks and Shares ISA that he is keen to fill. Should he…

Read more »

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

How’s the dividend forecast looking for Legal & General shares in 2025 and beyond?

As a shareholder, I like to keep track of the potential dividend returns I could make from my Legal &…

Read more »

artificial intelligence investing algorithms
Investing Articles

Could buying this stock with a $7bn market cap be like investing in Nvidia in 2010?

Where might the next Nvidia-type stock be lurking in today's market? Our writer takes a look at one candidate with…

Read more »

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »