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He Alternative investment market (AIM) is home to many smaller FTSE shares. The main advantage of AIM is that it provides access to the funds these companies need to grow, without the regulatory burden imposed by other markets.
But it sometimes leads to company valuations that seem far from reality. To illustrate this point, I have found two examples.
Onwards and upwards
Time finances (LSE:TIME) is a specialist lender to over 10,000 small businesses in the UK.
Since its initial public offering in August 2006, it has expanded both through acquisitions and organically. As of August 31, 2024, it had a loan book of £205m. In May 2021, the directors set a four-year borrowing target of £230m. It seems to me that you will achieve this goal comfortably ahead of schedule.
The company's results for the year ended 31 May 2024 (FY24) revealed revenue of £33.2 million (FY23: £27.6 million) and pre-tax profit of £5.9 million (FY23 : 4.2 million).
All of this positive news has helped its share price rise 98% since November 2023.
And with a book value of £66m and a current (6 November) stock valuation of £55m, there is reason to suggest its shares are undervalued.
But its shares are currently trading at a historical price-earnings ratio of 15.5, which is higher than all FTSE 100The banks.
Everywhere
In contrast, the share price of They (LSE:BGO) has fallen 39% over the past year.
Helps telecommunications companies and content providers retain customers by bundling subscriptions. It has a blue-chip customer list in a global subscription market that could, by 2026, be worth $600 billion.
But its stock price can fluctuate wildly.
For example, its stock value plummeted 40% on January 17 when it posted a trading update. The company warned of delays in securing new contracts and identified $2 million in unexpected costs.
On April 8, it presented its results for the year ended December 31, 2023 (FY23). Despite the increase of $6.7 million in after-tax losses, its shares rose 13.5%. The 62% growth in revenue is the only explanation I can think of for this seemingly perverse market reaction.
And inexplicably, on July 30, its stock price plummeted 12% after adding Nord Security products to its so-called digital vending machine.
No, thanks!
But despite their growth potential, I don't want to invest in any of these stocks.
They are too risky for me and have typical AIM stock characteristics that have historically deterred me from investing in smaller companies.
Time Finance's share price rise appears to be divorced from its underlying profitability. It now attracts a higher earnings multiple than, say, Lloyds Banking Group.
And loss-making Bango has a valuation 46% higher than Time.
Its share price is also very erratic. The combination of relatively few shares outstanding and a small market capitalization means that a deal of a few thousand pounds can have a dramatic impact on its stock market valuation.
I'm not saying they are bad companies. Its listing on AIM has played an important role in driving its impressive growth. But I prefer to buy larger companies (with more sensible valuations) and those whose stock prices tend to be more predictable.
