Should You Buy Data#3 Limited At This Share Price?

What happened to the DTL share price?

Data#3 Limited [ASX:DTL] has had its ups and downs over the decade. However, 2015 has been a rewarding year for DTL equity investors so far.

In a recent strategy study at Port Philip Publishing, I found my way to many small-cap tech companies such as Data#3. Many of these companies produced a great return and I was able to make a list.

If you look at the Australian tech sector by breaking it down into smaller industries, you can find interesting companies such as ICS Global Ltd in the health tech segment. In the hardware space, Codan Ltd has been interesting to watch.

Of course, most high return tech companies fall into the software & services category, of which Data#3 is a part.

What should you do with DTL shares now?

When I looked at those tech companies that paid a dividend, a very interesting relationship emerged. There is a semi-strong inverse relationship between dividend yield and 12 month revenue growth.

What does that mean? It means if you pick a company that will pay a great dividend, it will have a lower growth in revenue.

That could make sense if more mature companies with lower level growth paid more dividends. But there was no evidence showing an inverse relationship between market caps and revenue growth, so that theory does not stand.

When it comes to return on equity, high revenue growth in a small-cap tech company does not necessarily lead to a very high appreciation in its share price.

But in my mind, a strong bottom-line growth is still going to be the backbone for any company in the medium run.

This means investors need to be mindful of the trade-off between dividends and bottom-line growth when it comes to small-cap tech companies.

Ken Wangdong+
Emerging Market Analyst, New Frontier Investor