AIM tech stars of the future

Picking winners from the army of tech shares on the junior market is not straightforward, so former AIM writer of the year Andrew Hore reveals some of his best ideas. 

AIM is synonymous with growth companies and some of the most exciting companies are those developing and exploiting new technologies. 

These have the potential to be highly rewarding in share price terms, but not all of them prove to be a success. The best performers are not necessarily the more high-profile technology companies and some have taken time and have required patience from investors. 

Generally, it is not necessarily the most exciting, cutting edge companies that have performed the best. Many of the strong performers are steadier software providers, who continue to develop their products but are not in fashionable areas. These companies tend to be cash generative.

Sometimes companies can become fashionable and then fall out of favour. In the case of Wandisco, it has ended up being in and out of favour more than once. Over the past year, there has been a one-fifth decline in the share price. However, the WANdisco share price has risen by 385% over three years, yet it has fallen by 41.4% over five years. 

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The limits of taking share prices over random time periods is highlighted in the case of the distributed computing technology developer. WANdisco floated on 1 June 2012 at 180p a share, so the share price has risen by 257% since flotation, but it does not appear in any of the tables. The share price high was more than 1,500p just before the end of 2013. 

WANdisco appears to be on course to make the 2018 forecasts that were published at the time the 2017 figures were released. It continues to lose money, although there it could get near to breakeven in 2019 and then move into profit in 2020. 

A recognised winner

Robotic software developer Blue Prism joined AIM in March 2016 at 78p a share and the price has risen by nearly 2,800% since then. Over the past year, the share price has increased by 123%, but it has not been on the market long enough to have a three-year performance. 

Blue Prism is certainly one of the recognised technology successes for AIM. Management made the decision to grow in the US and other international markets and that was the main reason for the flotation.

Growth had previously been financed by cash generated from operations. Since flotation, further funds have been raised. 

Source: interactive investor (*)      Past performance is not a guide to future performance

Although Blue Prism is losing money it has certainly grown rapidly since joining AIM. It has a strong position in its market and it is making the most of that. The most recent interim revenues were 145% ahead at £22.9 million and the run-rate for recurring licence revenues was £4.4 million per month at the end of April 2018, compared with £1.7 million per month one year earlier.

Growth is coming from new customers and selling more to existing clients. Blue Prism would not have been able to grow as fast if it had not sought outside finance, and AIM has been able to provide that cash.

How Zoo Digital became a 10-bagger

Some companies have changed their business since floating. Zoo Digital provides localisation and dubbing services to film and television programme makers. The move to a cloud-based service has broadened the market and enabled a move into profit in the year to March 2018.

Content owners can sell programmes in additional territories because using Zoo's services means that it is economic to localise the content when it was not in the past. That means that the addressable market is even bigger because it includes back catalogue that would not have been localised previously.

The company floated in March 2000 as Kazoo3D, which was developing an ecommerce website for 3D content. Little more than one year later, the company bought Zoo Media Corporation and it was a few years later that Zoo focused on its current business. Although Zoo has performed impressively in the past decade the share price is still well below the original flotation level. 

Profiting from miracle material and online betting

Advanced materials developer Versarien started out as a developer of micro-porous metals for thermal management, combined with a cash generative manufacturer of sintered tungsten carbide products. 
Developing markets for the micro-porous materials has been a slow process and Versarien subsequently moved into the graphene sector. This has become the most prominent part of the business and the focus of growth.

Investor interest has built up over the past couple of years, helping it to become the best technology performer over one year. There is strong demand for Versarien fundraisings, as shown by the £5.15 million raised at 145p a share this week. That cash has helped to fund the £2.65 million cash and shares acquisition of a 62% stake in Gnanomat, a Spain-based company that can use Versarien's graphene technology in the production of energy storage devices for electric vehicles and electronic devices. Versarien is also providing a €1.25 million loan. 

Shorter-term performance can be sparked by changes in markets and regulation. GAN has benefited from the change in laws in the US regarding online betting and gaming. This has created demand for its online gaming technology, although this is yet to show through in the company's revenues.

Learning Technologies has been the best performer over three years, with a 1,730% gain, thanks to its successful buy-and-build strategy in the elearning sector. 

AIM tech stars to watch

The best bets for the future are likely to be those companies with a good track record. Companies developing new technologies and new markets are more of a gamble, which could pay off, but which can be difficult to judge, particularly when they are being hyped up. These investments should be a small proportion of a portfolio. 

Some companies, such as the best performer over a decade accesso Technology, are still growing but the sharp rise in the share price appears to be behind it. 

Blue Prism has hardly tapped its potential market, so there is plenty of scope for further growth, but one slip and the share price could slump. 

Craneware supplies financial and charging software to US hospitals and its income is in dollars, thereby providing some protection from a fall in the pound. Craneware has a good long-term track record and this is a growing sector, but this is reflected in the rating. That is because it is a quality business.

Rail and transport software and services provider Tracsis has a strong track record and it has always been upfront with investors if there is a possibility of any shortfall in profit against forecast. In reality, Tracsis has a track record of forecast upgrades. The August trading statement led to 5% increase in the earnings per share estimate to 24.5p for the year ended in July 2018, with slightly higher increases to earnings for the following two years. 

Source: interactive investor (*)      Past performance is not a guide to future performance

The shares are trading on around 29 times 2017-18 earnings and there is cash in the bank that can be used for earnings enhancing acquisitions. This makes Tracsis a long-term buy.

Castleton Technology, formerly Redstone, has made earnings enhancing acquisitions since focusing on providing IT and software for the social housing sector. Castleton has built up a significant position in this market and is benefiting from cross-selling software to existing customers. Management has experience of building up other software companies via acquisition.

This could be one for the future

Seeing Machines is a company that has been on AIM for 13 years and has benefited in recent years from focusing on its core activity of driver monitoring technology. There have been a number of spikes in the share price over the years. The automotive sector is a major opportunity, but it can take years to get designed in to a vehicle. This is beginning to happen.

At the end of April, Seeing Machines won an automotive design award from a premium German motor manufacturer, although the first models using the FOVIO driver monitoring technology will not go into mass production until 2021. This was the second award from a German manufacturer and could be worth A$25 million, but it will be over a number of years.

Other contracts have also been won, taking the total number with manufacturers to five. Between 2019 and 2026, the company estimates that the deals could generate A$138 million ($100 million) in revenues. This is not yet a cash generative business, so progress may not be smooth, but the potential is large and there is plenty of cash in the bank to fund growth.

*Horizontal lines on charts represent previous technical support and resistance. 

Andrew Hore is a freelance contributor and not a direct employee of interactive investor.