The Alternative Investment Market (AIM) is home to many smaller FTSE companies. The main advantage of AIM is that it provides access to the funds these companies need to grow, without the regulatory burdens imposed by other markets.

Sometimes, however, this makes company valuations seem disconnected from reality. To illustrate this point, I found two examples.

Onwards and upwards

Time finances (LSE:TIME) is a specialist lender to over 10,000 petite businesses in the UK.

Since its IPO in August 2006, the company has grown both through acquisitions and organically. As at 31 August 2024, the loan book was £205 million. In May 2021, directors set a four-year lending target of £230m. It seems to me that this goal will be achieved without any problems ahead of schedule.

The company’s results for the year ended 31 May 2024 (FY24) showed revenues of £33.2 million (FY23: £27.6 million) and pre-tax profits of £5.9 million (FY23: FY4). 2 million).

All this positive news has helped the company’s share price augment by 98% since November 2023.

And with a book value of £66m and a current stock market valuation (November 6) of £55m, there is reason to suggest that the company’s shares are undervalued.

However, its shares are currently trading at a historical price-to-earnings ratio of 15.5, higher than all of them FTSE100banks.

Everywhere

The price of the company’s shares They (LSE:BGO) is down 39% over the last year.

It helps telecom companies and content providers retain customers by bundling subscriptions. It has a list of the largest customers in the global subscription market, which could be worth $600 billion by 2026.

However, the company’s share price may fluctuate rapidly.

For example, its stock value fell 40% on January 17 when it released a stock update. The company warned of delays in securing up-to-date contracts and identified unexpected costs of $2 million.

On April 8, it presented results for the year ended December 31, 2023 (FY23). Despite an augment in after-tax losses of $6.7 million, the company’s shares rose 13.5%. A 62% revenue augment is the only explanation I can come up with for this seemingly perverse market reaction.

And inexplicably, on July 30, the company’s stock price fell 12% after it added Nord Security products to its so-called digital vending machine.

No, thank you!

However, despite their growth potential, I don’t want to invest in any of these stocks.

They are too risky for me and have characteristics typical of AIM shares, which in the past have discouraged me from investing in smaller companies.

It seems that the augment in Time Finance share prices is unrelated to the company’s results. It currently attracts a higher earnings multiplier than e.g. Lloyds Banking Group.

In contrast, loss-making Bango has a valuation 46% higher than Time’s.

The company’s stock prices are also very volatile. The combination of a relatively petite number of shares outstanding and a petite market capitalization means that a deal worth several thousand pounds can have a dramatic impact on a company’s stock market valuation.

I’m not saying these are bad companies. Their AIM listing has played an crucial role in fueling their impressive growth. However, I prefer to buy larger companies – with more reasonable valuations – and those whose share prices are usually more predictable.