If, like me, you’re a Tesco online shopper, you will already be receiving regular emails detailing the supermarket’s latest offers, which have been tailored to your own buys. Such specific targeting is made possible by sophisticated IT systems, which analyse vast quantities of data across literally billions of transactions every month. Clearly, the closer online promotions match customer preferences, the better the response rates. This level of intelligent data mining has helped Tesco become the UK’s number-one internet retailer. However, many other businesses across the world are trying to replicate Tesco’s success. Organisations increasingly view profiling as a vital part of their online marketing strategies. Yet many companies, and particularly medium-sized businesses, lack either sufficiently sophisticated customer databases or the online expertise to marshal the information. But one online marketing software developer has the answers.
Gamble of the week:Smartfocus (Aim: STF, 15.5p)
Enter Smartfocus, which is a leading developer of online marketing software. Smartfocus’s flagship application gives marketers access to huge databases, enables them to predict customer response rates to different types of promotions, and measure how well their campaigns are doing. Existing customers include Avis, Center Parcs, Hilton, Zurich Financials and News International. Like-for-like revenues soared 85% to £6m in 2005. While revenues were rising from a low base, they are forecast by Arbuthnot to grow organically to £9.2m and £12.1m respectively over the next two years.
Corresponding 2007 earnings per share, on a fully taxed basis, are expected to be 1.8p, thus putting the shares on a p/e multiple of around nine. Assuming that these forecasts are met, then this looks to be cheap for such a high-growth stock.
At Smartfocus’s trading update on 20 July, the board stated that: “Smartfocus had continued to make good progress, with a substantial increase in revenues in the first half of 2006 compared to 2005. The company has traded profitably during the first six months, while continuing to invest significantly in additional sales, marketing and implementation resources”.
It seems to me that the sales pipeline is strong and that in order to maintain its leading position, Smartfocus has chosen to carry on investing substantially in the long-term future of the business. Although such a strategy may hold back short-term profitability, I believe that management is taking the correct approach. Over the next two years, many potential customers will adopt similar next-generation systems. If smartFocus offers the best solution for these customers, then the company should win a greater share of new tenders. And given that current customer retention rates are high, it seems likely that these clients will develop into long-term customers.
Interim results are scheduled for Tuesday 19 September, and Arbuthnot have put a price target of 30p on the stock with a strong buy recommendation.
Recommendation: SPECULATIVE BUY at 15.5p (market cap £14.5m)
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