Yahoo Finance This hidden tech stock lost half its value – but three factors fill us with optimism
Gamma Communications exemplifies what has happened to so many technology-related stocks over the past 18 months or so. Its shares shot up in the early part of last year but then came tumbling down just as quickly. In fact Gamma has continued to fall and now trades at levels it first reached in early 2019.
It is striking that, in spite of this fall, we still have a paper profit of 82pc since we added it to our Inheritance Tax Portfolio in January 2018. Shareholders will now be wondering whether the sell-off has run its course and whether the stock now looks cheap.
If we use the crude method of looking at the share price graph since flotation in 2014, the shares appear to stand some way below where they would be if the rate of growth before that big jump had simply been maintained until now. This basic yardstick gives Questor the sense that yesterday’s valuation is at the very least not excessive – or if anything somewhat too low.
But let’s also look at how the company, which supplies advanced telecoms systems to businesses, is trading.
On Tuesday it reported “strong first‑half performance, continued cash generation and positive business momentum”.
It said that in Britain and Europe its recurring revenues, combined with “selected price increases and strict cost discipline”, had helped to offset inflationary pressures, while it continued to “proactively manage its supply chain”. As an example it said that in view of problems with the availability of various types of hardware it had deliberately built inventories in its “UK indirect” business to more than twice pre‑pandemic levels.
In Europe it said “good first-half financial performance” in the German business had “counterbalanced some headwinds in our smaller Spanish business”.
These optimistic statements were echoed in the numbers it published. As is normal with trading updates, figures were scanty, but Gamma did say it expected earnings per share for the full year to be towards the upper end of a range of 67.1p to 74.6p. If it manages the latter figure, the shares at £11.60 will trade at 15.5 times earnings.
It also said it had increased its net cash balance to £72.6m at the halfway stage, compared with £49.5m at the end of the previous year. This improvement came in spite of a £1.7m payment of “contingent consideration on acquisitions” and early supplier payments in exchange for “attractive prompt payer discounts”.
In Questor’s view an earnings multiple of 15.5 is far from expensive for a business that can boast a long record of growth in sales, profits, cash generation and dividends, along with net cash on the balance sheet. Hold.
Questor says: hold
Ticker: GAMA
Share price at close: £11.60
Update: tinyBuild
Shares in this video games company have also fallen badly; unfortunately in this case they are close to their record low and we have made a loss of 54pc on our tip of May last year. Again it is tech-related and we should not be too surprised in view of the severe sell-off in such stocks, led by the Nasdaq in America, since last autumn.
That sell-off appears to have bottomed out – in fact the Nasdaq has started to recover – so now would be a bad time to sell tinyBuild, unless of course something had changed for the worse in its business.
Fortunately that does not appear to be the case. In an update last month it said performance in the first half of the current financial year had been “slightly ahead of expectations” and it expected to “deliver full-year 2022 results at least in line with expectations”. It said it had released several new games in the first half and “continues to extract value from its back catalogue titles”.
In a note entitled “It won’t be tiny for long”, analysts at Peel Hunt, the broker, said the company was creating “franchises” from formats that gamers already loved in order to “increase future releases’ chances of success”, as well as “expanding into other media like TV and books”. They praised its policy of owning as much of the games’ intellectual property as possible and its focus on niche genres that allowed it to create loyal fan bases using “hyper‑targeted marketing”.
Peel Hunt said earnings expectations looked conservative and in view of the shares’ heavy sell-off it estimated their fair value at 200p, 69pc above the current share price. A strong hold.
Questor says: hold
Ticker: TBLD
Share price at close: 118.5p
Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 5am.
Read Questor’s rules of investment before you follow our tips.
