The Investment Column: Search no further... Autonomy looks a great investment

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The Independent Online

Our view: Buy

Share price: 426p (+17.25p)

It has taken some time but Autonomy, the internet infrastructure software company, has finally started to motor.

Autonomy was one of the high-profile UK tech bubble stocks - one of those companies that investors poured money into without really understanding what its technology did or why it was important. During the grim years that followed, Autonomy investors fed off interest made from cash in the bank. Many assumed that the Cambridge-based company would fall victim to Google's rampant march across the internet search sector as other dot.com era stocks crashed to earth.

Yet Autonomy operates in a different market to Google and its context-based search technology has steadily won more customers. It sells to governments, corporates and other organisations, enabling them to search a variety of media, from voice to video, for any topic under the sun.

The acquisition of its key rival Verity last year propelled the company into a position of clear market leadership.

While Autonomy now has 16,000 customers, its nearest competitor Fast Search has 3,500.

Meanwhile, customers have caught up with the need to use the vast swaths of dormant data trapped in their servers and data centres for a variety of reasons. Governments can use that information to track terrorists while corporate customers can search for product problems or customer trends.

In a brief statement, Autonomy has lifted the curtain on second-quarter results that will beat market expectations. Revenue will exceed a forecast range of between $55m (£29.8m) and $60m while adjusted profit before tax, which strips out share options and goodwill amortisation, will be higher than the $15.1m average market forecast.

The results will be reported in full on 26 July but are comfortably ahead of that reported in the seasonally strong first quarter when revenue was $56.1m and adjusted pre-tax profit $10.3m.

The second-quarter performance means that Autonomy has reported six consecutive quarters of record results, enough to impress even the most hardened technology cynic.

The company benefits from an operational model that means costs are kept very low. That means revenue growth feeds straight through to the bottom line.

With a customer base that stretches from Ford to the US Homeland Security department, Autonomy's progress looks set to continue. The company has also invested in broadening the applications of its search product outside corporate and government data trawling.

Its Aungate software helps customers meet compliance requirements; Virage is used for searching video files; etalk makes call centres more efficient while Cardiff provides business process management systems.

Autonomy also provides the platform for the world's largest video search engine - Blinkx in China. That gives it a toehold in the consumer search market.

As with all growth stocks, investors will be keen to cash in before the technology becomes commoditised but given its momentum and market leadership position in a burgeoning sector, Autonomy still looks a good investment. Buy.

NETeller

Our view: Avoid

Share price: 500p (-60p)

With the online gaming industry still booming, its leading supplier of money transfers would appear an odds-on bet for investors. NETeller, one of the biggest companies on AIM, has enjoyed something of a stellar run since its stock market debut in 2004.

During that time, the shares have more than doubled and its two Canadian founders, Stephen Lawrence and John LeFebvre, hit a £218m jackpot by selling down their stakes.

Pre-tax profits at the Isle of Man-registered company soared 114 per cent to $98m last year after sales surged 108 per cent to $171m.

About four-fifths of NETeller's sales are derived from the US, where the current legal framework generally prevents Americans from making direct payments to gambling websites using their bank cards.

But, as any gambler will readily admit, there is no such thing as a sure thing. Yesterday's update on trading in the second quarter of its financial year posed as many questions about NETeller's prospects as were answered.

Bad debts in Canada are on the up. So are costs. Margins are, therefore, being squeezed.

Meanwhile, NETeller's typical daily receipts and the average number of gamblers signing up for its services each day disappointed some City analysts, such as Tejinder Randhawa at Evolution Securities.

The lacklustre update saw the shares fall 60p to 500p, valuing the company at almost £600m. At 9.8 times this year's expected earnings and just 7.7 times next year's forecasts, the shares do look cheap against the wider online gaming sector.

But, with bets still being taken on whether an anti-gambling US administration will crack down on internet gaming, NETeller continues to look a risky punt. Avoid.

Spice Holdings

Our view: Buy

Share price: 274.5p + 4p

The exotically named Spice Holdings may sound like an importer of curry powder but is, in fact, the country's leading installer of water meters.

Shortages across the South contributed to the surprisingly strong 42 per cent surge in Spice's pre-tax profits to £7.4m in the year to the end of April, as more thirsty companies tried to regulate water usage.

Water services is now the fast-growing division of Spice, which was founded a decade ago by a management buyout at Yorkshire Electricity. Its other business lines - commercial services, which advises companies on energy efficiency, and telecoms - are doing nicely too. Both are reaping the benefits of shrewd acquisitions at reasonable prices by Simon Rigby, the chief executive, that have quickly enhanced earnings.

The City applauded yesterday's annual results and the shares advanced 4 to 274.5p, approaching their 287.75p high of May and valuing Spice at £136m. Spice shares are trading at about 15.5 times expected earnings for 2007, which makes them look relatively cheap against others in the sector. Serco, a rival, is trading at about 19 times next year's forecasted earnings.

Spice - the winner of the best newcomer gong at the latest AIM Awards Dinner in October last year - has a track record of successfully blending canny takeovers with organic growth.

City experts, such as the analysts at KBC Peel Hunt, foresee more of the same to come. They are telling clients the shares should hit 350p each.

Spice looks to be a tasty addition to any portfolio.

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