IODM Limited (ASX:IOD), is a AUDA$3.40M small-cap, which operates in the software industry based in Australia. While mobile and cloud computing become ubiquitous, there is a new wave of advancement emerging from innovations such as machine learning, robotics and augmented reality. Tech analysts are forecasting for the entire software tech industry, a highly optimistic growth of 45.26% in the upcoming year , and an enormous growth of 94.70% over the next couple of years. Not surprisingly, this rate is more than double the growth rate of the Australian stock market as a whole. Today, I will analyse the industry outlook, and also determine whether IODM is a laggard or leader relative to its tech sector peers. See our latest analysis for IODM
What’s the catalyst for IODM’s sector growth?
The battle for competitive advantage has led businesses to adopt new the cutting-edge technology, or risk being left behind. Many technologies are now coming into their own as their power and speed increase and the cost of delivering them goes down. And some are pursing growth through various strategies including new M&A, collaboration and alliances, as well as cost reduction and organic growth. In the previous year, the industry endured negative growth of -0.10%, underperforming the Australian market growth of 6.89%. IODM lags the pack with its sustained negative earnings over the past couple of years. The company’s outlook seems uncertain, with a lack of analyst coverage, which doesn’t boost our confidence in the stock. This lack of growth and transparency means IODM may be trading cheaper than its peers.
Is IODM and the sector relatively cheap?
Software tech companies are typically trading at a PE of 35x, above the broader Australian stock market PE of 18x. This means the industry, on average, is relatively overvalued compared to the wider market. However, the industry did return a higher 14.32% compared to the market’s 11.87%, which may be indicative of past tailwinds. Since IODM’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge IODM’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? IODM recently delivered an industry-beating growth rate in earnings, which is a positive for shareholders. If you’re bullish on the stock and well-diversified by industry, you may decide to hold onto IODM as part of your portfolio. However, if you’re relatively concentrated in tech, you may want to value IODM based on its cash flows to determine if it is overpriced based on its current growth outlook.