Why I believe these 2 secret growth stocks are set to outperform in 2018 and beyond
Kape Technologies(LSE: KAPE), which was until last week known as Crossrider, is one of the UK's fastest growing security software businesses.
Today the company reported that after a year of steady growth, thanks in part to several high profile hack attacks, revenue increased by 17.4% to $66.4m and adjusted earnings before interest, tax, depreciation and amortisation increased 29% to $8.3m for the year ended 31 December.
One of the group's best performing business divisions during the year was CyberGhost S.A, a leading software-as-a-service cybersecurity provider. This business was only acquired last year, but it has already performed ahead of management expectations contributing net profit of $1.5m in 2017. The number of customers using the business's services increased 21% to 887,000 during the year, which is still a relatively small amount compared to the size of the overall cybersecurity market.
Predictable recurring income
As well as being active in one of the most in-demand industries around, Kape's business model is geared to producing the best returns for shareholders. Indeed, it is expecting to deliver $8m of recurring revenue from existing users in 2018, around 12% of revenue reported for 2017. This recurring revenue provides a steady income stream for management, and as long as the company can continue to maintain its offering and reputation, then this guaranteed income should only increase.
The strengths of Kape's business model also show on the company's balance sheet. At the end of 2017, the firm had a cash balance of just under $70m (49.6p per share). It generated $7.6m in cash from operations during the year, all of which management is now proposing to return to shareholders by way of a special dividend amounting to $7m or 3.6p per share.
As Kape continues to build on its existing success, I believe the firm can achieve outstanding returns for shareholders, something I first realised back in August 2017. Demand for security software will only increase going forward, and the group's cash generative nature tells me that it has the potential to become a dividend champion as well as having plenty of cash available for bolt-on acquisitions.
Another fast-growing tech stock I'm positive on the outlook for is Taptica(LSE: TAP).
Building on the offering
It exploded onto the tech scene in 2016 when, after several years of fast-paced but unprofitable growth, the company reported a substantial net profit of $19.2m. And now the group has established a foothold in the online advertising market, City analysts are expecting revenues to jump 71% for 2017 and more than 50% for 2018. Off the back of this growth, analysts are expecting earnings per share growth of 59% for 2017, indicating that the shares are trading at a forward P/E of just under 14.
In my view, this low valuation does not reflect the company's explosive growth rate. What's more, Taptica has a net cash balance of around $33m or 37p per share.
According to my figures, based on the current estimates, excluding cash, the shares are trading at a forward earnings multiple of 12.7. Even if growth slows, this valuation undervalues the business in my view. For example, an online advertising giant such as Google parent company Alphabet Inc currently trades at a forward P/E of 27.
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Rupert Hargreaves owns no share mentioned. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. The Motley Fool UK owns shares of and has recommended Alphabet (A shares). 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.