UK growth stocks bore the brunt of the 2022 stock market correction. As such, plenty of businesses are trading below the £1 threshold.
A stock price alone is fairly meaningless since market capitalisation is ultimately what matters. But a low price does mean investors end up with more shares for their money, giving a sense of more substantial ownership. And now that economic conditions are slowly improving, snapping up thousands of shares in growth enterprises could be the key to capitalising on long-term recovery trends.
With that in mind, let’s explore two companies that have recently fallen out of favour but look primed for a comeback.
The return of digital advertising
Following lockdowns in 2020, the ecommerce industry skyrocketed as households became dependent on online shopping. This proved to be an enormous tailwind for advertising group dotDigital (LSE:DOTD).
The firm provides advertisers with an automated marketing solution. Businesses can use its platform to target customers with custom-tailored email, social media, and SMS marketing campaigns to boost recurring spending.
With much growth pulled forward, dotDigital has unsurprisingly struggled to keep up the momentum. And the situation has only got more challenging as economic conditions slow demand for e-commerce. That’s why the growth stock is down just over 70% from its August 2021 highs!
However, looking at its latest results, the top line is still expanding. And average revenue per customer is also rising, sitting at £1,573 per month versus £1,422 a year ago.
Of course, the company isn’t the only one playing in the digital marketing sandbox. And there are numerous competitors with more financial resources at hand.
But management recently announced that dotDigital’s platform now uses generative AI and machine learning to help marketers improve the effectiveness of their campaigns as well as provide predictive analytics. Therefore, I think it’s fair to say the firm is making the right moves to give customers a critical advantage.
Another growth stock comeback opportunity?
Shareholders of Learning Technologies Group (LSE:LTG) are most likely horrified by the growth stock’s performance. Despite the financials heading in the right direction, the shares have tumbled nearly 30% over the last 12 months. What’s going on?
As a quick reminder, LTG is a digital learning and talent management service business. Following the 2021 acquisition of GP Strategies, it’s one of the biggest companies operating in this space. And sales have grown significantly from £93.9m in 2018 to £596.9m at the end of 2022. Over the same period, earnings have jumped from £4.2m to £30.4m.
However, a large chunk of this growth stems from its GP Strategies acquisition, which is worrying investors. The deal was expensive, and management had to take on considerable debt to fund it. And now that interest rates have risen, the group’s finance payments have shot up from £2.5m to £10.5m in a year.
While the growth stock has the cash flow to cover this expense, it’s putting pressure on margins that are rightfully concerning shareholders. However, with the acquisition going surprisingly smoothly, management has forecast that operating margins are on track to improve, offsetting the debt impact while providing excess cash flow to bring down the balance of outstanding loans.
So, while it may take some time to digest the acquisition, LTG seems to be on course to deliver solid long-term performance, in my opinion.
