UK-listed tech priced cheaply for growth

Top of our Aim growth at a reasonable price (GARP) screen, Zoo Digital (ZOO) is forecast to achieve massive earnings growth (it fails our earnings growth test because the average EPS growth expected over the next two years is flagged as high enough to warrant a double-take). Alongside the organic growth for Zoo’s specialist localised cloud services for entertainment streaming services - which helps meet challenges of disseminating content to global audiences - the company has an aggressive investment and acquisition strategy.

Most recently, the company has been tapping equity markets for funding to acquire a partner business in Japan, which is currently the subsidiary of a Japanese technology company.  The capital raise was an oversubscribed £12.5mn new shares placing alongside a £0.16mn retail offer to existing investors. The issue price was at roughly a 13.5 per cent discount, and Progressive Equity Research estimates the increased share count will have a four per cent dilutive effect on 2024 earnings per share. These factors account for the market value pulling back, although the shares are still up by more than a quarter on a year ago.

Investors’ main questions should focus on those growth projections. The PEG ratios suggest it is very cheap, so further research here should centre on the diversity of the customer base and the nuts and bolts of revenue streams. Success and making good on the spectacular confidence of broker forecasts depends on relationships with the big content streaming services and whether Zoo can continue to grow its market share. 

GARP can be caught out by cyclical factors 

Screening can be caught out by cyclical factors and the mining industry is a prime example. Copper producer Antofagasta (ANTO) is the only UK large cap to pass our threshold of seven out of nine tests, but the share price has been drifting lower as have earnings growth assumptions when comparing the FactSet consensus data to when we last ran the screen. That means on a forward price to earnings growth (PEG) ratio, the stock is relatively more expensive even though the share price is lower.

Thanks to the weighting of share price to trailing earnings in the other PEG (the ‘genuine value’, see report for methodology) ratio that we use, ANTO, confusingly, looks slightly cheaper than before. The moral of the story is that mining company earnings are very lumpy and, therefore, our screen probably isn’t the best tool for timing an investment into cyclicals.

Or is it? Undeniably, there is a strong long-term need for copper: when the moderation of earnings forecasts made at the last peak is done, checking when the forward PEG and Genuine Value ratios are both attractive next to long-run averages could be a decent entry point. 

GARP investing really comes into its own when valuing companies with a much smoother earnings growth trajectory. Big tech would have come into that category over most of the past decade and it is interesting to see Meta Platforms (US:META), formerly known as Facebook, ranking highly on our S&P 500 screen. The share price has risen a third in the last three months as Big Tech stocks recovered ground from the 2022 sell-off.

Investors may have been lukewarm on the company’s big metaverse pivot but are perhaps keener on the noises it’s making on 2023’s biggest buzz technology, artificial intelligence. As discussed by Arthur Sants in his feature article last month, Meta is staying out of the bunfight over search engines and instead using AI to focus the experience of social media users and improve advertising targeting and engagement.

That focus on the core revenue-generating business may be music to investors’ ears, albeit requires substantial capex. More immediately, the fact Meta fails our test of year-on-year earnings growth for the last two quarters is testament to the maturity of those core business operations and their sensitivity to tougher economic conditions.