The FTSE AIM 100 index is home to many leading small-cap stocks. In fact, several of the businesses in my portfolio originate from this list. Companies such as dotDigital and Learning Technologies Group have been among my top-performing investments over the years. And even in the last 12 months, they’ve continued to deliver with returns of around 110% and 55%, respectively.
Recently, I’ve stumbled across another FTSE AIM 100 stock that I think could be an explosive performer for my portfolio in the long run. So let’s take a look.
A leader in music production equipment
The FTSE AIM stock in question is Focusrite (LSE:TUNE). It designs, develops, and manufactures a wide range of equipment and software for the music and sound production industries. What started out as a simple request from legendary Beatles’ producer, Sir George Martin, has evolved into an empire of music technology.
Despite its relatively small size, the management team has established the firm as a serious contender to become a future industry leader in my eyes. The rigorous attention to detail and quality standards have resulted in a Net Promoter Score of 75 last year. This implies that its own customers are encouraging others to buy its products. And thanks to numerous distribution agreements, Focusrite can deliver its goods around the world.
Covid-19 has been quite a disruptive force in many sectors. And music production was on my list of industries to be interrupted. But it seems, with everyone being stuck at home, the number of amateur and hobbyist music producers exploded. The firm’s revenue last year surged by nearly 54%, due to a sudden rise in demand from both existing and new customers.
The FTSE AIM 100 stock has its risks
As promising as the growth opportunity may be, I have some concerns. For the most part, Focusrite grew organically. But in recent years, the management team has begun making several large acquisitions.
In the last two years, it has acquired three leading brands. So far, these seem to be complementary additions to the product portfolio. However, historically speaking, acquisitive growth strategies can have a tendency to go quite badly. And often, they destroy shareholder value rather than create it. Suppose the company acquires an underperforming asset in the future? In that case, I think it’s likely to see the balance sheet, and consequently, the share price suffer.
Another serious threat in my mind is the agreements with distributors, or rather the limited number of them. Focusrite’s international sales are largely dependent on these ongoing relationships. And so, if these were to turn sour, the revenue stream could be significantly disrupted. This is especially true for North America as the company relies on a single distributor for the entire region.
The bottom line
Stocks always have an element of risk, especially those in the FTSE AIM 100 group. But as disruptive as the threats mentioned above could be, they’re ultimately in the management team’s control. That, to me, makes the overall risk profile more palatable. Therefore, with no signs of slowing down, I’m tempted to add Focusrite to my growth portfolio.
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Zaven Boyrazian owns shares of Learning Technologies and dotDigital Group. The Motley Fool UK has recommended Focusrite, Learning Technologies, and dotDigital Group. 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.