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This fund manager believes a bubble is brewing among small-cap tech stocks

Mr. Steven Johnson, Chief Investment Officer at Forager Funds, has highlighted eight small-cap technology stocks he believes are part of what he called “Dotcom Bubble 2.0”. Each company’s share price experienced stellar growth in 2017 and currently trade on lofty Price to Sales ratios, which Mr. Johnson says is being driven by a fear of missing out (FOMO) among investors.

Here are the eight companies he mentioned:

Updater Inc (ASX: UPD) develops and markets tools for consumers in the United States to complete move-related tasks. The company’s share price rose 203% in 2017 and has a market capitalisation of $710 million. For the six months ending 30 June 2017, Updater made an after-tax loss of US$5.73 million on revenues of US$505,017.

GetSwift Ltd (ASX: GSW) provides cloud-based logistics management software. GetSwift shares increased 1,120% in 2017 and the company has a current market cap of $590 million. For FY2017, GetSwift recorded revenue of $336,356 and a loss of $1.92 million.

LiveHire Ltd (ASX: LVH) is a developer of human resources technology products and has a market cap of $318 million. LiveHire shares rose 278% in 2017, with revenues of $775,845 and a loss of $4.65 million for FY2017.

Buddy Platform Ltd (ASX: BUD) provides data aggregation and management platforms for Internet-connected devices. For FY2017, Buddy had revenues of $1.05 million and a loss of $16.95 million. The company has a market cap of $257 million and enjoyed share price growth of 350% in 2017.

Yojee Ltd (ASX: YOJ) is a developer of logistics software which aims to optimise and manage fleets. The company’s shares went 750% higher in 2017 and now has a market cap of $213 million. Yojee had revenues of $132,901 and recorded a $1.86 million loss for FY2017.

Livetiles Ltd (ASX: LVT) has created a suite of web-based software products for the digital workplace and has a market cap of $196 million. The company made a $7.10 million loss on revenues of $1.77 million in FY2017. Livetiles shares rose 250% in 2017.

Digitalx Ltd (ASX: DCC) states it provides initial coin offering services, blockchain consulting services and blockchain-related software development. For the year ending 30 June 2017, Digitalx reported revenues of US$47,133 and a loss of $3.97 million. Digitalx has a market cap of $180 million and the firm’s share price has risen close to 800% in the past twelve months.

Linius Technologies Ltd (ASX: LNU) has developed technology to value-add to standard video content, and the company’s share price is up more than 300% in the last year. In its 2017 Annual Report, Linius had revenues of $41,492 and recorded a loss of $4.23 million. Linius has a market cap of $160 million.

Foolish takeaway

When investing in shares for the long-term, it’s important to focus on a company’s fundamentals; its ability to generate earnings and cash flow, and its financial health. While stocks in hot industries may rise quickly in the short-term, it is a firm’s earnings power that will ultimately determine long-term investment returns.

That’s not to say that these eight companies won’t be successful, just that investors should ignore the noise and instead carefully consider what price they are paying for a stock that doesn’t have any earnings.

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Returns as of 6th October 2020

Motley Fool contributor Ian Crane has no financial interest in any company mentioned.  The Motley Fool Australia has recommended LIVETILES 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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