Growth stocks like NIO, Palantir and Deliveroo are making headlines. But long term, will they deliver for shareholders? I’m not sure. For me, though, these two UK growth stocks have far more potential to deliver share price growth, and I’m monitoring them as potential additions to my portfolio.
A growth stock with great quality
UK identity verification technology group GB Group (LSE: GBG) has been able to raise expectations already this year because of increased transaction volumes. Management was able to announce that results for the full year will be ahead of consensus expectations with forecast revenues to be at least £213m, and operating profit above £53m.
Increased buying online and more digital banking are two trends that I think are likely to keep boosting the shares. I see investing in the group as a way of tapping into the increased digitalisation in our lives. GB also has solid fundamentals, and it’s profitable with high margins. For me, this makes it a strong growth share.
What are the risks?
As with any tech share, there’s a technological risk. Technology can become obsolete, or a competitor can just offer a better service. There’s always a risk that key customers could move to a rival in future.
More immediately, there’s a risk that the conditions, which have been favourable, could change. Any perception that GB Group won’t be able to keep growing revenues could hit the share price.
That’s especially important with a growth stock. So there’s a valuation risk with GB Group. Earnings growth at the technology company has been modest, yet it trades at a price-to-earnings (P/E) ratio of around 41. For an innovative tech company, this is broadly in line with other UK tech shares, but it’s still high compared to other sectors.
A gaming stock with potentially further to rise
Last month, video games developer and creative partner Team17 (LSE: TM17) reported revenue growth of 34% in its unaudited final results. A back catalogue of games is creating income streams for the future, by this, I mean popular games will earn royalties and income for many years to come. By way of analogy think about how Bloomsbury still earns money from Harry Potter or songwriters from songs written many years previously.
Gaming has also been one of the ‘winners’ from lockdown, but its growth should continue to be strong even when many customers have the option to do other activities. Gaming is hugely popular around the world.
Again, the main risk with this share is the valuation. The P/E is 42. It should be remembered though that the shares have been more expensive in recent months and that ratio isn’t out of kilter with other similar companies. For example, Frontier Developments has a P/E of 69.
Overall though I think Team17 is a growth stock that has very good fundamentals, an entrepreneurial CEO who is also the founder, and is in an industry with strong growth potential. That all seems to me like a very solid combination.