ReadCloud Limited (ASX:RCL), might not be a large cap stock, but it led the ASX gainers with a relatively large price hike in the past couple of weeks. As a small cap stock, hardly covered by any analysts, there is generally more of an opportunity for mispricing as there is less activity to push the stock closer to fair value. Is there still an opportunity here to buy? Today I will analyse the most recent data on ReadCloud’s outlook and valuation to see if the opportunity still exists.

Check out our latest analysis for ReadCloud

What's the opportunity in ReadCloud?

According to my valuation model, ReadCloud seems to be fairly priced at around 3.99% above my intrinsic value, which means if you buy ReadCloud today, you’d be paying a relatively reasonable price for it. And if you believe the company’s true value is A$0.39, then there isn’t really any room for the share price grow beyond what it’s currently trading. In addition to this, ReadCloud has a low beta, which suggests its share price is less volatile than the wider market.

Can we expect growth from ReadCloud?

Future outlook is an important aspect when you’re looking at buying a stock, especially if you are an investor looking for growth in your portfolio. Although value investors would argue that it’s the intrinsic value relative to the price that matter the most, a more compelling investment thesis would be high growth potential at a cheap price. With revenue expected to more than double in the next few years, the future appears to be extremely bright for ReadCloud. If expenses can also be maintained, it looks like higher cash flow is on the cards for the stock, which should feed into a higher share valuation.

What this means for you:

Are you a shareholder? It seems like the market has already priced in RCL’s positive outlook, with shares trading around its fair value. However, there are also other important factors which we haven’t considered today, such as the financial strength of the company. Have these factors changed since the last time you looked at the stock? Will you have enough conviction to buy should the price fluctuates below the true value?

Are you a potential investor? If you’ve been keeping an eye on RCL, now may not be the most advantageous time to buy, given it is trading around its fair value. However, the optimistic prospect is encouraging for the company, which means it’s worth diving deeper into other factors such as the strength of its balance sheet, in order to take advantage of the next price drop.

So while earnings quality is important, it's equally important to consider the risks facing ReadCloud at this point in time. For example - ReadCloud has 4 warning signs we think you should be aware of.