Back in 2019, AIM-listed marketing software business Eagle Eye Solutions (LSE:EYE) had a share price in pennies. Its fortunes changed in the pandemic. The stock enjoyed a stunning rally and its value quintupled, supported by impressive financial results. At one point, it reached a high of £6.75.

But this week, disaster struck. On Monday (2 June), the company’s share price plummeted 42%. The ex-penny stock’s now changing hands for around £2, and its market cap has crumbled to £61.2m.

What’s behind the catastrophic fall? Is Eagle Eye Solutions now a cheap stock to buy or a value trap to avoid?

What the company does

Founded in 2003, this software as a service (SaaS) company offers digital marketing services and powers loyalty schemes for businesses. Its client base is concentrated in retail, travel, and hospitality.

Notable examples of Eagle Eye Solutions’ partnerships include Tesco‘s Clubcard Challenges programme and the PizzaExpress omnichannel loyalty scheme. The company’s cloud-based AIR platform executes around 1bn personalised offers for customers each week.

Why the share price crashed

The massive sell-off in Eagle Eye Solutions shares was triggered by the termination of a high-margin contract to provide digital promotion services for a national US grocery retailer. The agreement will expire on 2 August.

This deal was worth around £9m-£10m in annual revenue for the firm. Measured against last year’s total sales of £47.7m, it’s clear that this is a crippling blow.

Having an overreliance on a single client is a big risk for any company, but it can be particularly acute for a small-cap stock. The group has admitted the impact on its FY26 performance “will be material“.

Responding to the disappointing news, Eagle Eye Solutions announced it will implement cost-cutting measures, and the firm was keen to highlight it remains optimistic about future growth opportunities. Clearly, the market takes a gloomier view.

What the future might hold

Arguably, the board’s optimism about the trading outlook has some credibility. The balance sheet looks healthy with a net cash position of £12.5m and access to £20m of undrawn facilities. This equips the company with financial firepower to respond to the contract loss.

Meanwhile, growth opportunities from artificial intelligence (AI) are another positive. AI tools provide scope for tailored personalisation at a mass scale, and Eagle Eye Solutions has been bolstering its capabilities in this area. In addition, the recent appointment of AI and big data specialist Zyed Jamoussi as Chief Technology Officer could prove to be a shrewd move.

However, I’m concerned about the ending of the key US partnership and the impact it could have on future capital investments. It might not be sufficiently devastating to send the shares back into penny stock territory. That would require more than a further 50% fall from here. But it’s a huge storm cloud on the horizon.

There’s a chance investors may be handsomely rewarded if Eagle Eye Solutions can take the contract loss in its stride. Unfortunately though, the risks look too big for me right now to join their ranks.

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Creo Medical Group

What it does: Creo Medical manufactures instruments used in minimally invasive endoscopic surgery.   

By Ben McPoland. I reckon Creo Medical (LSE: CREO) stock has the potential to rise much further. In 2023, the medical device company is expected to have grown its revenue 13% to around £31m.  

In 2024 though, its top line is forecast to accelerate to around £40.6m as more surgeons are trained to use its Speedboat product. This versatile electrosurgical device is saving certain NHS hospitals a fortune as part of their bowel cancer and endoscopy services.

According to the company, Speedboat technology has helped drive an 87% reduction in the average length of stay from 8.39 days to 1.07 days. Over a one‐year period, costs were reduced from £8,800 per patient to £3,600 (a 59% reduction). 

Now, one thing holding the stock back is a lack of profitability. Creo is still loss-making, which adds risk to the investment case here. However, it expects to reach cash flow break-even in 2025, with profits following after.

If it can achieve this while still growing revenue by double-digits, then I think the share price can explode higher from this point. That’s 34p, as I write. 

Ben McPoland owns shares of Creo Medical. 

Eagle Eye Solutions Group

What it does: This tech company specialises in personalised digital marketing, offering a third-party-integrated platform.

By Oliver Rodzianko. Eagle Eye Solutions Group (LSE:EYE) seems to be offering advanced and personalised marketing solutions at just the right time. With artificial intelligence (AI) now being adopted by the mainstream, the desire for unique promotions will become the new standard. Eagle Eye is one of the firms leading in providing this.

One element that stands out to me regarding its financials is that it holds no typical debt and has only a moderate amount of other liabilities like accounts it owes. That lays the foundation for a solid investment, in my opinion.

It’s worth bearing in mind that Eagle Eye faces competition from some leading companies like Salesforce Marketing Cloud, Adobe Experience Cloud, and Cheetah Digital. It’s going to have quite a challenge on its hands in remaining competitive in AI with the bigger players. Nonetheless, Eagle Eye has still bagged customers like Asda, Pret, and Halfords so far.

Oliver Rodzianko owns shares in Salesforce.

Hostelworld

What it does: Hostelworld is a booking platform that focuses on hostels, in a large variety of tourist destinations worldwide.

By Christopher Ruane. If you try and book a hostel in most of Europe for this Summer, you’ll notice a few things. Availability is often tight – and prices are typically much higher than they were a few years ago.

Travel demand remains high, which is good for accommodation booking platforms in general. But the comparatively low cost nature of many of the sleeping options listed by Hostelworld (LSE:HSW) could mean that bookings stay strong even if an economic downturn hurts the higher end of the industry.

Revenues are soaring: Last year they increased 33% and surpassed pre-pandemic levels.

The company is profitable again after a few years of heavy losses. Net debt fell sharply last year to €12.3m.

The business model is simple and the low marginal cost of expansion is attractive. The pandemic era showed that a sudden slump in demand can see revenues collapse. But Hostelworld has bounced back and I think looks set for ongoing growth.

Christopher Ruane does not own shares in Hostelworld.

Porvair

What it does: Porvair makes specialist filtration equipment for aerospace, life sciences, and metal melt applications.

By Stephen Wright. With a market cap of £282m, Porvair (LSE:PRV) is the smallest company I own in my portfolio. But I rate its growth prospects extremely highly.

The company has a couple of different sources of growth. The first involves making more money in its existing operations and the second is through acquisitions.

Porvair operates in industries where competition is limited – or sometimes non-existent. That gives the company an ability to raise prices incrementally. 

There are also opportunities for growth by acquiring other companies. This can be risky, but Porvair’s size means it should have plenty of opportunities.

The company’s end markets are also cyclical, which is another risk. Aerospace turned down during the pandemic and healthcare inventories have been at elevated levels since.

Despite this, I bought the stock recently because I think it’s well worth the 17 times earnings the stock trades at. And I plan to continue doing so in the future.

Stephen Wright owns shares in Porvair.

Renold 

What it does: Renold is an international supplier of industrial chains and related power transmission products.

By Edward Sheldon, CFA. Right now, there are lots of small-cap stocks with explosive growth potential. However, one I want to highlight is chain and gear manufacturer Renold (LSE: RNO).  

There are several reasons I’m bullish on this stock. One is that it looks very undervalued at present. Currently, Renold has a price-to-earnings (P/E) ratio of just six. Considering that the company has a near-record order book, and that profits for the year ended 31 March 2024 are expected to rise 27%, that valuation strikes me as way too low.

Another is that around 40% of the company’s revenues come from the US. Given that the construction industry in the US is booming right now due to infrastructure spending, I think there’s potential for future results to be better than expected. 

Now, it’s worth pointing out that Renold has some debt on its balance sheet. This is not ideal in a high-interest-rate environment. 

At the current share price and valuation, however, I think the risk/reward setup looks quite attractive. 

Edward Sheldon has no position in Renold 

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Listed on AIM in 2014 with a placing at 164p a share, this little-known company — which released its annual results today — is currently trading at 242p, valuing the business at £62m.

Eye on the prize

Eagle Eye is a technology company that validates and redeems digital promotions in real time for the grocery, retail and hospitality industries. Its current 233-strong customer base (up from 219 last year) includes such notable names as Tesco, Asda, J Sainsbury, John Lewis, Marks & Spencer, Ladbrokes and Pizza Express.

The company today reported a 71% increase in revenue to £11.1m for its financial year ended 30 June. It also said: “The board is excited and confident in Eagle Eye’s capabilities to exploit the considerable global market opportunities in 2018.”

The man at the helm — Warren Buffett’s smart guy — is Tim Mason. A guru of strategic marketing and customer loyalty, he was instrumental in launching Tesco’s formidable Clubcard and transforming its customer data analysis. With this pedigree, it’s hard to think of anyone better equipped to develop Eagle Eye’s business (I disregard the poisoned chalice handed to him of leading Tesco’s expansion into the US.)

Genuine growth opportunity

The company is at the early-growth stage and is currently lossmaking (a £2m operating cash outflow and £1.6m spent on investing activities) but a gross margin up 9% to an impressive 88% means operational gearing should kick in big-time as revenues grow.

Revenue growth could be tremendous, because it seems that current significant customers will only “begin to transact through the platform at scale” in the coming quarters. This, together with new contract wins and renewals, suggests there’s a very strong demand for Eagle Eye’s technology.

I’m not generally keen to invest in lossmaking companies. However, the strength of the management team, signs that this is a genuine growth opportunity, and what I view as attractive multiples of 5.6 times trailing sales and four times current-year forecast sales, lead me to rate the stock a ‘buy’ at the riskier end of the investing spectrum.

Wonderful company at a fair price

A long-established (founded 1908) and rather less speculative AIM stock I’m keen on right now is £640m cap Nichols (LSE: NICL). This soft drinks business is not only superbly managed, but also has other Warren Buffett-type qualities.

It has strong brands led by its flagship Vimto, good profit margins with an operating margin in excess of 20%, and delivers a high return on equity having averaged near to 30% over the last five years. It also has great balance-sheet strength, with £29m cash and no borrowings, and a tremendous record of double-digit earnings growth.

At a share price of 1,740p, Nichols trades on a current-year forecast multiple of 24.6 times earnings, falling to 22.6 next year. This isn’t cheap but neither is it outrageous for a quality company in a defensive sector. I rate the stock a ‘buy’ on the basis of Warren Buffett’s maxim: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

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