Could Minds + Machines Group Ltd make you a million in 2018?

According to Minds + Machines' (LSE: MMX) year-end trading update, which was published today, 2017 was a period of growth for the company.

However, despite making progress with revenue and profit rises, as well as improving its balance sheet, shares in the company are down around 10% over the past 12 months.

Maiden profit

The contrast between Minds' share price performance and the underlying business performance could not be more different. During 2017, the number of domains under management by the group grew 67% to over 1.32m and billings jumped by nearly 100% against the first half. A billings figure of $10m was reported, compared to $5.6m for the six months to June 2017. Total billings of approximately $15.6m are now expected for the full year.

After a strong performance in 2017, Minds, which describes itself as "one of the world's leading owners and operators of Internet Top-Level Domains," is now profitable for the first time in its history. This is a huge milestone for the business and marks the beginning of a new chapter. According to today's update, for the first time, recurring income from subscription services now exceeds operating costs "which have been reduced to below $5.5m for 2017."

For the full-year management is now expecting earnings before interest, tax, depreciation, and amortisation to be "slightly ahead of market expectations." Meanwhile net cash on the balance sheet had improved to $15.9m at year-end (up $0.6m year-on-year), "despite settling $3.1m of balance sheet liabilities in the year associated with contracts restructured in 2016."

All in all, it looks as if Minds has exited 2017 with a stable core business that's primed for growth in the years ahead.

Time to buy?

I've been following it for the past year. After the company reported its half-year figures at the end of September, I claimed that once the firm published its maiden profit, the market would view the business in a different light and hopefully re-rate the stock. With the shares trading higher by 20% in early deals this morning, it looks as if this is indeed the case.

And it looks as if the shares are still undervalued despite today's gains.

For example, City analysts are currently expecting the company to report revenues of £13m for 2018. The tech sector is currently trading at an average price-to-sales ratio of four so placing this multiple on sales gives a market value of £52m, excluding cash of around £11.1m.

Including cash, the company should be worth £63m compared to today's £57m. However, considering the high double-digit sales growth rate Minds has achieved in the past, I believe that City forecasts are understating the group's potential. What's more, as I covered in April last year, management has been active in returning some of this to shareholders, and I wouldn't rule out additional cash distributions to boost returns over the next 12 months.

That being said, as is the case with all early-stage growth companies, Minds' growth is not a sure thing, and it's best to hold the stock as part of a well-diversified portfolio.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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