U.S. Markets close in 6 hrs 19 mins

Can First Derivatives plc (LON:FDP) Compete With Tech Giant Peers?

First Derivatives plc (LON:FDP), is a UK£837m small-cap, which operates in the IT services industry based in United Kingdom. In the past decade, mega-tech companies, have built highly successful and ubiquitous platforms and ecosystem in which smaller companies gravitate towards. However, more specifically in the IT service industry, tech analysts are forecasting a positive double-digit growth of 21% in the upcoming year , and an enormous growth of 63% over the next couple of years. This rate is larger than the growth rate of the UK stock market as a whole. Today, I will analyse the industry outlook, as well as evaluate whether First Derivatives is lagging or leading in the industry.

View our latest analysis for First Derivatives

What’s the catalyst for First Derivatives’s sector growth?

AIM:FDP Past Future Earnings October 9th 18

Since the regulatory environment is unlikely to become less complex, organizations will need to address the constantly evolving rules for governing data. In the previous year, the industry saw growth of 5.9%, though still underperforming the wider UK stock market. First Derivatives leads the pack with its impressive earnings growth of 13% over the past year. Furthermore, analysts are expecting this trend of above-industry growth to continue, with First Derivatives poised to deliver a 35% growth over the next couple of years compared to the industry’s 21%. This growth may make First Derivatives a more expensive stock relative to its peers.

Is First Derivatives and the sector relatively cheap?

AIM:FDP PE PEG Gauge October 9th 18

IT services companies are typically trading at a PE of 36.82x, above the broader UK stock market PE of 16.77x. This means the industry, on average, is relatively overvalued compared to the wider market. However, the industry returned a similar 12% on equities compared to the market’s 12%. On the stock-level, First Derivatives is trading at a higher PE ratio of 70.22x, making it more expensive than the average IT services stock. In terms of returns, First Derivatives generated 7.4% in the past year, which is 4.2% below the IT services sector.

Next Steps:

First Derivatives is an tech industry laggard in terms of its future growth outlook. In addition to this, the stock is trading at a PE above its peers, meaning it is more expensive on a relative earnings basis.If First Derivatives has been on your watchlist for a while, now may not be the best time to enter into the stock. If growth and mispricing are important aspects for your investment thesis, there may be better investments in the tech sector. However, before you make a decision on the stock, I suggest you look at First Derivatives’s fundamentals in order to build a holistic investment thesis.

  1. Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
  2. Historical Track Record: What has FDP’s performance been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
  3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of First Derivatives? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.