In an article published on 2 January, entitled 3 UK stocks I’d buy TODAY for 2020 and beyond, I listed three growth stocks that I thought were top buys. Under-the-radar cybersecurity specialist Avast (LSE: AVST), which is a constituent of the FTSE 250 index, was one of the stocks I highlighted.
Since that article, Avast shares have performed well, rising from 475p to 505p (they were as high as 551p last week but have since pulled back). That’s a decent performance, particularly when you consider that the FTSE All-Share index has fallen by more than 2% since then.
Price target upgrades
What’s interesting, however, is that since I tipped the FTSE 250 company, three separate brokers have increased their price targets for the stock, with one broker increasing its price target by a whopping 38%. In order, they are:
6 January: Credit Suisse raised its target price to 540p from 480p
13 January: JP Morgan raised its target price to 550p from 400p (and upgraded its stance to ‘overweight’ from ‘neutral’)
21 January: Jefferies raised its price target to 627p from 453p
While all three price target increases are encouraging, it’s the last one from Jefferies that stands out. Not only did the broker increase its price target by nearly 40% (you don’t see increases of that magnitude very often), but the new target is 24% higher than the current share price. Clearly, analysts at Jefferies are quite bullish on Avast.
Crunching the numbers, I think a share price of 627p is certainly achievable in the not-too-distant future. Looking at the earnings forecasts, City analysts currently expect the cybersecurity company to generate earnings per share of 34 cents this year. If we convert that figure to sterling (26p per share), a share price of 627p equates to a price-to-earnings ratio of 24.1. I think that’s a reasonable valuation for this FTSE 250 company.
The reason I say this is that Avast has significant growth potential. In an increasingly digital world, where billions of smart devices are communicating with each other, cybercrime is becoming a real problem. According to experts, the total annual cost of cybercrime could hit $6trn by next year, representing the greatest transfer of economic wealth in history.
As a global leader in the consumer cybersecurity market, with over 435m active monthly users of its products worldwide, Avast is well placed to benefit from the cybercrime threat. Its solutions, which use artificial intelligence and machine learning technology to protect today’s connected homes (televisions, webcams, baby monitors, thermostats, smart front doorbells) and prevent malicious malware threats, privacy data leakage, and device hijacking, are likely to remain in high demand.
Analysts currently expect Avast to generate revenue growth of about 7% this year. Earnings per share are expected to rise nearly 10%. If the company can achieve that kind of growth, a share price of 627p shouldn’t be too far off, in my view.
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Edward Sheldon has no position in any 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.