Recently, growth stocks haven’t been in favour with investors due to fears of rising interest rates. Governments worldwide have been supporting their citizens in an attempt to reboot their economies after pandemic disruptions. However, pouring vast amounts of money into economies means inflation is rising. And when inflation goes up, historically, interest rates rise too, which is bad news for growth stocks carrying big debt loads.
However, as my colleague, Edward Sheldon, has pointed out, the US S&P 500 growth index is back on the rise. In other words, growth stocks are becoming more popular once again. And so, with that in mind, let’s take a look at two growth stocks that I own and would buy more of today.
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A potential UK leader in gaming
Lockdown restrictions imposed when the pandemic began led to a surge in gaming activity. The experience was an excellent way to pass the time while being stuck at home. At least, that’s how I saw it. So I wasn’t surprised to see that an Interactive Software Federation of Europe report that revealed a 16% rise in average time spent playing video games last year. While player activity has undoubtedly receded as lockdown restrictions have eased, the digital medium remains incredibly popular. And that’s excellent news for Frontier Developments (LSE:FDEV).
This development studio is behind several leading franchises, including Elite Dangerous, Planet Coaster, and Jurassic World Evolution. Unlike its competitors, Frontier employs what the management team calls a “launch and nurture” approach. Whenever a new title is released, the studio continues to produce new content and release updates even years after. This is why Elite Dangerous still has around 500,000 monthly active players, despite being released nearly seven years ago.
As promising as this strategy has been, Frontier’s business is still exposed to some significant risks. The recent launch of its Odyssey expansion pack was not well received by players. A common theme of negative reviews was the abundance of bugs and glitches preventing an enjoyable experience. Needless to say, this will impact sales. And if the company is unable to resolve these issues quickly, gamers may turn to other titles.
A promising growth stock in digital payments
Alpha FX (LSE:AFX) is a financial services company that helps international businesses reduce exposure to currency exchange risks. Currency risk management is its key source of income. And thanks to its commission-based cost structure (rather than the expensive hourly rate alternative banks typically use), the firm continues to attract new clients.
However, that’s not why this growth stock made it into my portfolio. The management team recently launched a new digital payment processing network for enterprise-scale international transactions. Using traditional money-sending solutions is a time-consuming process that can land companies with enormous processing fees. Alpha FX’s answer is cheaper and allows transactions to occur almost instantly.
This division currently only contributes around 13% of the revenue stream. But that’s up from 3% in 2019. And over time, I’m expecting this new payments solution to become the dominant revenue driver for the business. However, it not immune to competition or operational problems. The payment network is almost entirely dependent on an underlying network of multinational banks. Suppose the relationship between the business and these institutions become strained? In that case, it could cause significant disruptions to its income as well as reputation among customers.