Here’s why the shares of CogState Limited rocketed 22% today

It has been a great start to the week for shareholders of cognitive science company CogState Limited (ASX: CGS). Its shares jumped a massive 22% this morning following the release of a positive first quarter update to the market.

CogState provides testing software to some of the world’s largest pharmaceutical companies that assists them in achieving more accurate results from their drug trials. Demand for its services has been growing strongly recently, not least in the most recent quarter.

For the quarter ended September 30 2016 the company reported an 82% jump in revenue over the prior corresponding period to $11.1 million.

Perhaps even more impressive though was the news that the company has a record pipeline of contracted revenue totalling $55.5 million. An estimated $28.7 million of this pipeline is expected to be recognised in the 2017 financial year.

Driving the strong performance were a series of new clinical trial contract signings. New contracts worth US$17.3 million were signed in the quarter, making it the largest quarter of contract signings in its history.

This ultimately meant the company was profitable in the first quarter and the future pipeline has given management the confidence to believe it will remain profitable for the first half of its financial year.

Whilst I really like CogState and believe it does have a bright future ahead of it, I wouldn’t necessarily rush into an investment just yet. Instead I would suggest investors wait until the company provides its full year guidance after its half year results.

Its shares are trading on high multiples and in my opinion the company will need to justify this in its guidance. Failure to do so could see its share price take a tumble, especially after its 267% rise in the last 12 months.

For now I would suggest investors add CogState to their watch lists and look at investing in other tech shares such as Altium Limited (ASX: ALU) and Aconex Ltd (ASX: ACX).

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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