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Touchcorp Ltd slumps 14% – Is this top tech share now cheap?

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Cloud-based software developer Touchcorp Ltd (ASX: TCH) is hardly a well-known name amongst investors but all that could change over the next few years if the group successfully executes on its growth strategy.

Currently the stock has a market capitalisation just north of $250 million, making the stock far too small for many institutional investors to own and also too small for most broking analysts to cover.

Despite its relatively small size, Touchcorp has been a success story for investors in the initial public offering (IPO) who subscribed for shares at $1.40 apiece. In the past year the stock has soared as high as $2.77 and even after Monday’s 14% share price slump to $1.85, IPO investors are still comfortably “in the money”.

Yesterday’s tumble was in reaction to the ASX release of the group’s half year results which presumably disappointed some investors.

Here’s what was reported.

  • Revenue leapt 21% to $22.5 million
  • Profit before tax soared 71% to $7.2 million
  • The balance sheet is solid with no debt and cash of $3.2 million
  • Touchcorp owns 50 million shares in the recently floated tech business Afterpay Holdings Ltd (ASX: AFY)
  • New customer wins included Change Up, Cornercard and Once Group, which should all add long term transaction and revenue flow to the group in coming periods

What now

Long term investors won’t focus too heavily on whether yesterday’s results beat or missed expectations, rather they will be more concerned with Touchcorp’s expected future cash flows.

On some metrics Touchcorp’s shares are starting to look attractive – particularly considering the value ascribed to the business after subtracting the Afterpay shareholding. However the lack of guidance from the company will no doubt have some investors wondering just what to expect next.

Despite the exciting growth prospects of Touchcorp, smaller companies do generally carry greater risks for investors. That’s why some investors searching for exciting tech companies might prefer to focus on larger, more established companies such as WiseTech Global Ltd (ASX: WTC) which has a market capitalisation of $1.4 billion.

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Returns as of 6th October 2020

Motley Fool contributor Tim McArthur has no position in any stocks mentioned. The Motley Fool Australia owns shares of TOUCHCORP FPO. 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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