Why ReadCloud Limited rocketed 65% on its ASX debut

The ReadCloud Limited (ASX: RCL) share price rocketed upwards 65% today to $0.33 after its capital raising was initially at $0.20 per share.

ReadCloud describes itself as a leading provider of digital eReading solutions to Australia secondary schools. The platform delivers Australian school curricula digitally in one app across many devices.

Inside the app students and teachers can share notes, questions, videos and weblinks within the platform.

ReadCloud was started in 2009 and began with three schools using the platform in 2015 to fifty schools and 21,800 users in 2017. The company believes that with refinements to the app and additional sales staff it can position the company to target 2,700 secondary schools and 1.6 million students.

The company expects to increase the number of users by 100% to 45,000 in 75 schools by June 2018, concentrating on the higher margin direct sales to schools.

According to ReadCloud’s prospectus the company generated statutory revenue of $331,967 in 2016 and $608,261 in 2017. It made a statutory profit of $123,463 in 2016 and $147,070 in 2017. It can be quite rate for these technology companies to make a profit early on.

If the business had been listed on the ASX during these years then it would have made losses due to corporate expenses such as ASX fees. The business will need to grow underlying profit quickly to make listing worthwhile.

ReadCloud already has reseller contracts with a few large school-related providers. One is Officemax, which sells books and stationery to over 2,000 primary schools in Australia and launched into the secondary market a couple of years ago. ReadCloud also has an agreement with Jacaranda, one of the largest textbook publishers in Australia, used by 1,900 schools, 100,000 teachers and one million students.

There are massive amounts of money spent on schools and students each year, so there’s a large theoretical market for ReadCloud to target. Learning is becoming more digital and a platform that combines everything together is a good selling proposition to schools.

Foolish takeaway

ReadCloud could be an exciting opportunity, but investors must remember that the business is at the start of its journey to generate meaningful, recurring profits whilst also paying ASX fees. I am going to keep my eye on ReadCloud, its first report will be telling to see if it delivers on its lofty user growth goals.

Until I see more of ReadCloud, it’s probably better to invest in these top growth stocks instead.

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Motley Fool contributor Tristan Harrison has no position in any of the 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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