Investors that want rapid growth from a UK stock should look at marketing platform Dotdigital (DOTD:AIM).

We believe it is a true UK software-as-a-service (SaaS) rarity and that its shares will reward investors handsomely in the coming years.

The stock is not cheap, on a June 2022 price to earnings multiple of around 50. It is also listed on the junior AIM market, which will not suit all investors, but we think near-term forecasts simply do not capture the potential of this business.

For years advertisers relied on TV, radio and print media to get their message out, but the internet has transformed marketing. These days, email, smartphones and social media are the dominant ways to reach audiences.

Digital marketing channels have three key advantages; they are cheaper, faster to deploy and measurable, giving advertising departments far greater bang for their buck.

Dotdigital’s platform provides the tools needed for modern digital marketing professionals. Its Engagement Cloud platform, formerly dotmailer, provides marketers with a single solution to design, create, personalise and monitor email marketing campaigns as well as drive broader engagement with SMS messaging, push notifications, live chat and social advertising.

Engagement Cloud can be deployed as a standalone solution or as an integrated module within many existing digital commerce platforms, such Microsoft Dynamics, Salesforce, Shopify and Magento. The company cut its teeth in the UK but international growth is increasingly the focus from bases in London, New York and Sydney.

AMBITIOUS ORGANIC GROWTH TARGETS

Dotdigital targets organic growth of 15% to 20% a year with operating margins of a least 15% (the five year average is nearly 25%). Opportunistic value-adding acquisitions that speed up innovation, expand geographic reach and/or build strategic alliances will be on top of that.

In the six months to December 2020 Dotdigital posted 22% organic revenue growth to £28.2 million from a combination of new business and upsells to existing customers. Adjusted earnings before interest, tax depreciation and amortisation rose 13% to £10.5 million with international expansion and product investment remaining high.

Dotdigital is not short of quality business credentials. 93% of revenue is recurring while 70% to 80% of operating profit typically converts to cash (75% in the first half). Returns on capital employed, invested capital and equity have averaged around 25% over five years, indicating that Dotdigital can continue to grow profitably and that it is using its cash to great effect. It has around £20 million in the bank and zero debt.

The company has certainly been a Covid winner with the stock rallying from 95p to 160p in 2020. But Dotdigital is exposed to structural growth drivers that extend far beyond lockdown, underpinning our optimism for the future.

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