I’d invest £1,000 in this high growth stock

This AIM-listed stock has seen great growth over the past year and chances are that it can continue to look good.

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Since I last wrote about Team17 in mid-March, the stock has jumped 11%. Over the past year its share price is up 30%. The AIM-listed video game developer, continues to look like a good stock to buy based on this. But is its story as strong as it looked last year? In this article I try and find out. 

Encouraging update from Team17

Because of its robust past performance, I was looking forward to its trading update for the six months ending 30 June, which was released a few days ago. In 2020, Team17 showed a strong 34% revenue growth. But the update does not say much except that it enters the second-half of the year “in great shape”

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While this is encouraging, I would have really liked some more detail. The video games industry may not grow at the pace it saw last year, when we had limited options for entertainment in the outside world. I was interested in knowing how its story has evolved since restrictions started easing. 

This is even more significant in light of a recent report saying that the industry could actually shrink this year. This is partly because 2020’s numbers are tough to beat. But also because of other reasons, like chip shortages. And there is greater competition among entertainment options now as the lockdowns have ended. 

Expanding its market

For now though, we have to wait until September, when Team17 releases its results to know more. It would also be good to know more about its recent acquisition. Last month, it said that it was acquiring Ireland-based StoryToys, which develops educational apps for children. The company is expected to help it grow its audience and tap into a market it believes has accelerated during the pandemic. Since it is profitable, Team17 also says it will be “immediately earnings accretive”

Early last year, it had also acquired Yippee Entertainment, a software developer and digital games publisher. I think these are good signs for the company’s future growth, provided that these acquisitions turn out well. These can have a bearing on its share price too. 

Would I buy Team17 shares?

At present, this growth stock’s price is fairly elevated. Its price-to-earnings (P/E) is 49 times. While its past growth, its latest update, and the long-term future of the industry can justify it, it remains to be seen whether it sustains the strong numbers from last year. 

If it does not, it is likely that its share price could decline from here. This is especially so now, when a lot of other companies’ performance is picking up as the effects of reopening are felt on the economy. In any case, its share price does have a tendency to fluctuate, though overtime it has been on an upward trajectory. 

On the whole though, I think the Team17 share remains a good growth stock for me to buy with £1,000 at hand, though I would prefer to buy it at a more competitive price. 

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Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

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