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Growth is growth, but what do you pay? These high priced growth stocks are all vulnerable to changing sentiment, but if you can ride even one winner, you should end up way ahead. How do you reduce your risk?
What is important is the combination of the sales multiple and the prospective sales growth.
Under the Radar investigated a med-tech we were interested in, Alcidion (ALC), because of its growth potential. We thought subscribers would be interested in our analysis.
Last month the company raised $16.2m at 18 cents a share from institutions to “accelerate its growth strategy”. It must be growth, right?
Certainly, it has an interesting story. But interesting stories are not enough to justify spending your hard-earned money on. You would often be better off buying a good novel.
After this capital raising and some initial success, the healthcare information systems specialist is now cashed up and trying convert itself into a “software as a service” money making machine.
The company has always had e-health diagnostic technology. Its problem was that it didn’t have any distribution. Put another way, it didn’t have relationships with big payers like hospitals. Then in April last year, the company was effectively (reverse) taken over by a smaller entity MKM Health, whose CEO Kate Quirke is now CEO of Alcidion. MKM has experience in workflow management and patient care, providing hospitals with access to various products on platforms as an IT services provider. Now, instead of simply selling other vendors’ products, MKM has Alcidion’s diagnostic technology to sell.
During the 12 months to 30 June, the company produced revenues of just under $13m through installing products in Australia and the UK. In the current financial year the company should be cash flow breakeven.
Why doesn’t Under the Radar recommend the company? For one thing, there is its market cap of over $200m is large for a company that is barely profitable. Another thing is that its growth isn’t spectacular, considering it is coming from such a low base. There is a flip side to this, in that much of its growth is anticipated as being from software as a service revenues, which are stable, high margin and recurring. Still, it trades on a forecast sales multiple of 12 times and we don’t think that the distribution network that it has set up is there yet (maybe it will once it’s spent the $16m). Hospitals are very hard to access and the lead times for major sales can be very long (we have learned this the hard way).