As the THG share price climbs 6%, is it a best-buy growth stock?

Could shareholders be set to profit from a new bull run for the THG share price? Here’s a look at how this year is going so far.

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The THG (LSE: THG) share price jumped 6% in early trading on 17 October, in response to a third-quarter update.

The price is still down 88% since the stock floated in 2020. But I can’t help thinking we might be looking at a tasty second bite of the growth cake now.

What’s changed?

What are the key highlights from Q3?

Revenue figures for the whole quarter were down on the previous year, across all business categories. An overall 4.4% drop is not great.

But it sounds like we might have passed the worst now, with THG describing it as its “best quarterly revenue performance in the last year.

And the company returned to positive growth, in constant currency terms, in September.

Bad spell

THG, which provides direct-to-consumer online retail services, has suffered from a downturn in demand for beauty and nutrition products. The update spoke of “global de-stocking,” but says it’s eased now.

We’re heading into the Christmas period, so I can’t help thinking the positive momentum could keep going in the final quarter.

The firm still expects full-year revenue to be somewhere between flat, and a 5% fall on the previous year.

But could it set up THG for a better 2024? There are reasons to think it might, as the firm says capital expenditure should be less than previously thought.

Balance sheet

There’s one main risk for me with a company like this. And it’s all about lack of profit. Broker forecasts still have none on the cards in the next few years, although they do show losses falling.

That doesn’t mean a growth stock isn’t a good investment while it’s making a loss. But it does make me focus on the balance sheet.

The Q3 update is upbeat on that score. CEO Matthew Moulding said “The group is exceptionally well invested with a strong balance sheet.”

Cash is what counts

And it reported a “strong cash performance” in the quarter, with a £5m inflow in the last 12 months.

I always worry that a company at this stage might need fresh capital injections, which could dilute existing shareholders. But if cash flow stays strong, that risk should be lessened.

And at the halfway stage, THG reported £563m in cash and available facilities, which looked pretty good to me.

But my eyes will rush to the balance sheet, and to cash flow measures, when I see the full-year results. We don’t know when that will be yet, but we should hopefully see a full-year trading update in January.

My verdict?

I like the positive vibes from this latest update, and it’s good to see improving cash flow.

But next year’s fall in capital expenditure could be a bit double-edged. It could help boost profit margins here sooner. But might it also put a crimp in the firm’s growth plans? The need to save cash isn’t an ideal thing to see in an early-stage growth stock.

I think the next few quarters could swing things. But I just don’t know which way yet. I’ll keep watching.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft 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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