The Calnex Solutions (LSE: CLX) share price has been motoring recently. Shares in the company, which tests telecoms equipment, and should benefit from the rollout of 5G, are up 15.5% in a month. Over 12 months, the shares are up by around 100%. They certainly have momentum then. So is it a top growth share?
The business is growing its top line strongly. Revenue has gone from £8.42m in 2018 to £18m this year. So it has more than doubled in three years. Operating profit went up, even through the pandemic. This shows the high demand there is for Calnex’s services. Margins are very strong.
There should continue to be a lot of demand for its services as 5G is rolled out over the coming years. According to Grand View Research, the global 5G testing equipment market is set to grow by around 9% per year between 2020 and 2027.
Strong update
Last month, Calnex posted a good trading update for the six months to 30 September. It advised that performance in the first half of its financial year had been strong and that it expects this trend to continue through the second half of the financial year, driven by the rise in demand for 5G and cloud computing. It added that it expects revenue and profits for the full year to be “materially ahead” of its previous expectations.
These kinds of ahead-of-expectations updates tend to be very good for the share price. Further updates, therefore, could boost the share price.
Risks to be aware of
One risk to monitor here is the ongoing semiconductor shortage. So far it seems that Calnex hasn’t been materially affected by the shortage. However, that could change as the shortage drags on. Another risk is exchange rate movements because the telecoms testing group earns a large chunk of its revenues in US dollars, so a strengthening pound could hit profitability.
Many investors like to see a dividend because it indicates management has confidence in the business. Calnex doesn’t pay one. That may just mean it’s investing for future; for example, its new Paragon-neo platform is already attracting promising levels of pre-orders. Perhaps it will pay a growing dividend in the future, and it’s not a sign of a deeper problem. However, it does mean if I owned the shares, I’d be relying just on share price growth without any income from Calnex to fall back on.
So there are risks, as with any business. Calnex Solutions is profitable and cash generative and should benefit from 5G in the coming years.
That’s why, overall, Calnex Solutions strikes me as a good company. However, there are a lot of other UK growth shares that I also like so I’m in no rush to add Calnex Solutions to my portfolio unless the shares dipped a lot and became irresistible.
Andy Ross owns no shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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