Here’s why I think this share could be poised for a rebound from its bearish downtrend.

A plot twist

For those unfamiliar, Zoo Digital provides cloud-based localisation services for the entertainment industry. That is, it specialises in subtitling, dubbing, and captioning to adapt TV and film content for global audiences.

The firm collaborates with a worldwide network of 12,000+ freelance workers, helping the likes of Netflix reach a wider international audience. It has production hubs in strategic global locations to ensure a 24/7 service offering.

Up until FY24 (which ended in March), revenue growth had been exceptional, surging from $28.6m in FY18 to $90.3m by FY23. This culminated in an $8m net profit, a significant improvement over previous years.

Then, like in many movies, a plot twist suddenly derailed the progress. And ironically enough, this came in the shape of the 2023 Hollywood strikes involving actors and writers, which brought the production of new content to a screeching halt.

As a result of this disruption, the firm expects FY24 revenue to be much lower (around $40m), with a fairly hefty EBITDA loss. Anticipation of this caused the elephant-sized sell-off in Zoo Digital shares.

Rebuilding revenue

But there may be a happy next episode to this story. That’s because the Hollywood strikes ended in November and in a May trading update, the company said customer demand had continued to recover.

March recorded the highest invoicing since April last year (when the strikes really got going). This was driven by an accelerated pipeline, with the expansion of work persisting into April.

Plus, the firm was recently selected as a primary vendor by a major film and TV distributor, securing significant orders for language dubbing and subtitling. And it’s now opened dubbing studios in Milan.

In the update, Zoo Digital said: “With market commentators forecasting a return to 2022 levels of entertainment output in 2025, the Board continues to see opportunities to rebuild revenues following the significant industry disruptions of FY24“.

Comeback storyline?

In March, the company had a net cash position of $5.3m, down significantly from $23m in June 2023. It’s renewed its debt facilities with HSBC for an additional 12 months, amounting to $3m.

Therefore, a key risk here is another sudden disruption to the entertainment industry. That would heap further financial pressure on the firm.

Despite this risk, I think Zoo Digital might be set for a turnaround in fortunes. Revenue for Q1 FY25’s expected to be 36% higher than the same quarter last year. And together with recently implemented cost savings, the firm expects EBITDA break-even in the quarter.

Meanwhile, it continues to leverage artificial intelligence (AI) to enhance its end-to-end services. And management fully expects to return to profitable revenue growth as things pick back up.

The stock’s trading on a price-to-sales (P/S) multiple of 1.3, which is pretty low. Pair this with its 70% slump from March last year, and I think it looks very attractive. I’d invest at 63p if I had any spare cash.

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However, I stand to profit handsomely if a strong rebound occurs after I invest. This is especially true, I feel, if we can identify why the stock is down in the first place and assess whether the dark clouds are temporary.

In the case of the following penny stock, I think there is the potential for a huge recovery in the share price. Here’s why.

Hollywood strikes

The stock I’m talking about is Zoo Digital (LSE: ZOO). It provides creative media services, including dubbing, audio description, translation, and subtitling, to major Hollywood studios and streaming platforms. These include Disney, HBO, and Sony Pictures.

In just five months, the shares have crashed 70%. This has left the Sheffield-based tech company with a market capitalisation of just £61m.

In July, the company delivered a trading update that sent the share price crashing 28% in one day. The reason for the sell-off was that revenue fell in Q1 due to two issues.

First, the Hollywood writers’ strike has been going on since 2 May. The walk-out is over pay and the threat of artificial intelligence (AI) replacing content creation. Actors have now joined the strike, effectively putting a freeze on the creation of all new content in Hollywood.

This is now having an impact on the level of localisation and media service work on new titles, which is hurting the company. However, management expects these to be “short-term market factors“.

The second issue is that its customers are cutting costs as advertising spend weakens. Plus, there’s the ongoing transition of the global entertainment industry from traditional television towards streaming. The problem, though, is that most streaming businesses still aren’t profitable, putting further pressure on budgets.

However, Zoo’s management thinks these cost reductions will enable it to take market share as customers favour it over smaller niche vendors. And it expects revenue growth to resume in the second half of FY2024 (the company’s financial year ends on 31 March).

These problems could be temporary

Prior to these interruptions, the company recorded four years of impressive top-line growth. Revenue increased from $28m in FY2019 to $90.3m last year. And FY2023 adjusted EBITDA doubled year on year to $15.5m.

But the recent share price weakness has left the stock trading on a price-to-sales (P/S) ratio of 0.88. That is incredibly cheap for a growth company increasing its annual revenue by double digits and still expanding internationally.

Plus, the company is financially strong with a net cash position of $23m at the end of June. This means it has enough cash to ride out this rocky period without taking on debt or diluting shareholders while the stock is down.

Of course, we don’t know how long the Hollywood strikes will last. But if they persist, that may force streaming platforms to acquire non-English content. That could drive demand for Zoo’s dubbing, translation, and localisation services.

If the headwinds the company faces prove to be temporary, the share price could rebound very strongly. After all, the shares were at 207p as recently as March. I’m very tempted to buy.

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Current pressures

At face value, Netflix’s latest results last week were hugely encouraging. A 7.7m increase in subscriber numbers during the fourth quarter smashed forecasts of around 4.5m.

Yet the streaming giants face an uphill battle in 2023 as the cost-of-living crisis intensifies. This naturally poses dangers to companies that provide streaming services like Zoo Digital Group (LSE:ZOO), too.

At $16.8bn, Netflix spent $863m less on content creation in 2022 that it had the year before. More big reductions are anticipated across the industry as streaming companies protect profit margins.

An AIM starlet

That said, as a long-term investor, I believe the streaming industry remains an attractive place to put my cash. After all, forecasters think the global market will expand at an eye-popping compound annual growth rate (CAGR) of 21.3% between 2022 and 2030.

And I believe Zoo Digital may be the best way to do this. This AIM business allows TV and movie companies to globalise and localise their product.

The problem with investing in streamers like Netflix is that competition is fierce. Disney, Amazon, and Apple are just a few others fighting a bloody war for subscribers. And of course these businesses have to compete against free-to-air broadcasters and cable services providers.

This is why investing in ‘pick-and-shovel’ stock Zoo Digital could be a better idea for me. It provides the tools for streamers to produce their content, insultating it in a fast-growing-yet-highly-competitive market.

Key to big returns?

For the same reason, I believe software development services provider Keywords Studios (LSE:KWS) is a top buy. In fact this is a tech stock I already hold in my Stocks & Shares ISA.

The video games market is also highly cut-throat. But this UK share — which provides technical and creative services to games studios — isn’t hampered by intense competition, either.

Okay, demand for Keywords’ services could also be affected by the cost-of-living crisis. And a shortage of acquisition targets could also derail its long-term growth plan.

But the rate at which its end market is also tipped to grow still makes it an exciting AIM share to me. New console launches and rapid emerging markets growth should supercharge the video games market over the next decade.

Two top UK value shares

I think these two hot growth shares are great buys for patient investors. And I think, at current price levels, they might be too cheap to miss.

Zoo Digital trades on a forward price-to-earnings growth (PEG) ratio of 0.1. Any reading below one indicates that a share is undervalued by the market. And Keywords Studios carries a PEG ratio of 0.3.

With spare cash to invest I’ll be looking to buy both these value stocks for my ISA in February.

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Riding the streaming boom

The vast amount of choice that TV viewers have today has sparked an arms race among the streaming giants. The likes of Netflix, Disney, and Amazon are spending eye-popping amounts on content to attract our attention. WarnerMedia and Discovery plan to raise the bar even further, too: they plan to spend $20bn on programming for their Discovery+ and HBO Max platforms when their merger completes later this year.

All of this bodes well for Zoo Digital Group (LSE: ZOO). This almost penny stock provides a range of production services for broadcasters, movie studios, and streaming companies. These include subtitling and dubbing programming, fine-tuning scripts, and optimising content for local audiences.

Last month Zoo Digital raised its revenue growth forecasts for the current financial year (ending March 2022) to 44%. The tech firm said that its strong order pipeline continues to grow, too, giving it robust profits visibility beyond the medium term. And it said that its appointment as primary vendor for the European launch of a global streaming service “will lead to significant orders commencing in quarter four and delivering meaningful revenues in financial 2023”.

Terrific value for money

Zoo Digital’s earnings outlook looks pretty sunny, then. And this is reflected in current City forecasts. Analysts think the business will bounce back into profit this year following the initial stresses caused by Covid-19. They reckon earnings will jump 141% in the upcoming financial year beginning in April. An extra 52% is forecast for financial 2024 as well. Like all forecasts, these could change based on future developments.

I believe these estimates could make Zoo Digital too cheap for me to miss. They mean that, at current prices of 125p per share, the company trades on a forward price-to-earnings growth (PEG) ratio of 0.5. Conventional investing theory says that a reading below one means a stock could be undervalued by the market.

Another nearly penny stock I’m considering buying

Oxford Metrics (LSE: OMG) is one more almost penny stock on my watchlist today. This UK tech share doesn’t offer the same sort of value as Zoo Digital. But at 105p per share it still trades on a quite reasonable forward PEG ratio of 1.

I like Oxford Metrics because demand for its motion tracking technology is robust. It is used to produce special effects in movies, helping highways authorities monitor traffic flows, and assisting clinicians with administering healthcare. The range of applications for the tech is steadily rising.

It’s why City brokers think earnings at Oxford Metrics will rise 37% in this financial year ending September 2022. They’re tipping profits to increase by 16% next year as well.

Of course Oxford Metrics and Zoo Digital aren’t without risk. The former, for example, needs to invest colossal sums in its products to remain competitive, something that can be a drag on profits growth. Meanwhile Zoo Digital could suffer if demand for streaming services begins to fall. But at current prices I believe these two cheap UK shares are still top buys for my portfolio right now.

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Top growth stocks

So which ‘no-brainer’ growth stocks would I consider buying in February? At the top of my list right now is a small medical equipment provider called SDI Group (LSE:SDI). It focuses on digital imaging and sensor products. What I like about this Cambridge-based business is its strategy. It aims to grow by buying smaller, niche and high-margin businesses. By allowing them to operate somewhat independently, SDI can respond quickly to new trends and events. It’s a strategy that seems to be working. Sales have tripled over the past five years, while profits have grown six-fold.

Bear in mind that to continue above-average growth it will need to keep finding new businesses to buy. That can take time so I might need to be a patient investor. And acquisitions can be risky too if they don’t work out. But with a profit margin and return on capital both above 20%, I’d say this is a high-quality business. For me, mixing growth and quality characteristics is a winning combination and I’d be happy to add it to my Stocks and Shares ISA.

TV and Movies

The next top growth stock I’d buy in February is Zoo Digital (LSE:ZOO). With a market capitalisation of just £125m, it’s firmly in the small-cap group. But what it lacks in size, it makes up for in potential. Zoo provides media services to the global entertainment industry. For instance, it provides a host of services including subtitling and dubbing to adapt TV and movie content to global audiences.

Major global streaming giants like Netflix continue to create more content for its subscribers. Global content spend has reached record levels and is forecast to rise further over the coming years. It’s creating volumes of TV material that needs to be prepared for distribution in many countries and languages, resulting in more demand for Zoo’s services.

An exciting growth story

It’s not just Netflix either. WarnerMedia, NBCUniversal and ViacomCBS have all launched streaming video platforms in the US and they’re expected to expand internationally in 2022. I reckon all of this new original content bodes well for Zoo over the coming years.

A word of warning, though. The profit margin is relatively slim at under 3%. I’d like Zoo to focus on growing that number. A greater margin could provide more of a buffer. Also, as the market grows it could invite stronger competitors. Zoo will need to stay on its toes to keep up.

That said, Zoo recently reported a strong trading performance, and it expects revenues for the year to be ahead of analyst expectations. Also, it’s encouraging that it has been appointed as a primary vendor for an upcoming European launch of a streaming video service. This is likely to raise sales further. Overall, the future looks bright for it in my opinion and I’d buy this growth stock today.

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A top renewable energy stock

Renewable energy stocks offer plenty of opportunity for UK share investors like me. But I don’t just have the option of buying into firms that generate clean energy like wind or solar farm operators. Stocks making the technology that stores energy is another very good way for me to make money.

This is where Gore Street Energy Storage Fund (LSE: GSF) comes in. This ‘nearly’ penny stock buys and constructs battery storage assets the length and breadth of Britain. We don’t stop using electricity when the wind doesn’t blow and the sun doesn’t shine. As a result, these sort of assets are essential to ensure we are constantly supplied with power. And it’s a sector that’s growing quickly as investment in renewable energy sources shifts through the gears.

A word of warning however, Gore Street has a lot of debt on its books. It therefore could see finance costs rise sharply if interest rates soar.

On cloud nine

Technological advancements and changing life/work balances meant remote working was growing strongly before Covid-19. The onset of the pandemic supercharged the practice of working away from the office. It could remain a big part of life in 2022 too, given the current elevated rate of infections.

All this bodes well for firms like Redcentric (LSE: RCN). This particular UK share provides cloud computing services that enable employees to do their jobs wherever there’s an internet connection. Sales have slipped more recently (down 4.1% year-on-year in the six months to September) but this reflects the blowout comparisons of the same 2020 period.

I’m confident Redcentric will get back on the front foot sooner rather than later, helped by its acquisition of Piksel in September. I think it could deliver strong profits growth, despite the threat posed by US industry giants like Microsoft.

A trip to the Zoo

Zoo Media Group’s (LSE: ZOO) another technology company I’d buy for the new year. This near-penny stock supplies a wide range of services for broadcasters, streaming companies and film studios. These include dubbing and subtitling movies and shows, providing script creation assistance, and localising content such as programme titles, synopses and artwork.

The company’s major partners include the likes of Disney, Netflix and WarnerMedia. And I fully expect demand for its services to keep rising as investment in content booms. Disney, for example, is set to raise spending by $8bn year-on-year in 2022, to $33bn. Fierce competition means that other major players, including Apple, Amazon and ViacomCBS, will surely continue spending heavily as well.

I think Zoo Media could make its shareholders stacks of cash in this climate. I’d buy it even though profits could suffer in the near term if soaring Covid-19 cases forces the film and TV industries to close down again.

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According to Statista, more consumers were intending to spend more on culture and entertainment in the second quarter (with a net balance of +13%). What’s more, spending intentions for eating and drinking out were even stronger (with a balance of +16%). These played into the hands of Everyman, a cinema operator whose venues allow people to dine, drink and watch movies.

In fact trading has been better than even the firm expected since it reopened its 33 venues in mid-May. Admissions up to 1 July were at 66% of 2019 levels, even though social distancing requirements remained in place.

Everyman’s boutique cinemas offer a more distinctive experience than the likes of Odeon and Cineworld. This also helps it to fight off the threat posed by the streaming companies like Netflix better than the competition. I’d buy this ‘nearly’-penny stock despite the threat of fresh Covid-19-related lockdowns amid increasing infection rates.

Another ‘almost’-penny stock I’d buy

The amount that streaming companies Netflix, Disney, Apple and Amazon are spending on content is rocketing. Cash spend on the creation and licensing of fresh content soared to $220m in 2020 as these US giants fought for supremacy, according to Purely Streamonomics.

It doesn’t look like the party’s over, either. According to Purely: “Even more spending growth is on the short-term horizon as a new wave of ad-supported platforms start gaining a stronger foothold around the world.” Added to predicted spend from subscription-based services, Purely thinks total expenditure will surge to a new record of $250m in 2021.

All this bodes well for Zoo Digital Group (LSE: ZOO). This stock provides a range of services for streaming companies, broadcasters and movie studios. These include overlaying dubbing and subtitles on programming, managing script creation and ensuring that content is compliant across regions.

Revenues at Zoo Digital exploded “at least” 51% year-on-year between January and June, to $25m, the UK share’s latest update in August showed. It said that services to support the migration of existing shows onto streaming platforms, allied with the subsequent launch in new territories helped to drive the top line.

The former penny stock added that it had received orders related to new titles “in recent weeks.” And it said that it expects “the associated pipeline of work will build gradually over the coming months.” It’s worth remembering that business could cool if Covid-19 cases continue to rise and creative industries are forced to close down again. But this wouldn’t stop me buying Zoo Digital shares today. I think the future is very bright here as the streaming industry goes from strength to strength.

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The prospect of temporary choppiness doesn’t put me off, though. This is because I buy UK shares with a view to holding them for the long haul. Let me present three top nearly penny stocks I’d buy right now to make robust long-term returns.

SaaS star

I think Tribal Group’s (LSE: TRB) recent transformation programme could reap terrific rewards in the years ahead. This low-cost UK share offers a range of software services that allow educational institutions to serve and communicate with their students more effectively. And recently the IT firm has switched to a “software as a service” (SaaS) model to boost recurring revenues and give earnings growth a shot in the arm.

The former penny stock has been active on the M&A front too and recently acquired scheduling-and-timetabling-solutions specialist Semestry. It also continues to invest heavily in its Edge cloud-based range of products and launched its Edge Admissions module last month. I think it’s a top buy despite the ever-present risk of systems failure and data loss. Such occurrences could cause significant reputational damage that might harm sales to existing and potential customers.

Another top nearly penny stock

Zoo Media Group’s (LSE: ZOO) a nearly penny stock I think will thrive in an increasingly digitalised world. This particular UK share offers cloud-based media services to movie studios, streaming services, and television producers. Not only is it benefiting from the huge investment streamers like Netflix are spending on their own content. Zoo Media is also enjoying soaring demand for its localisation services as content is beamed around the world and dubbing and subtitling is needed.

I’d buy this UK share even though its elevated valuation could cause a problem later on. Zoo Media’s forward price-to-earnings (P/E) ratio of 55 times might prompt a share price crash if news flow around the company starts to disappoint.

Pensions powerhouse

I think pensions consultancy and administrator XPS Pensions Group (LSE: XPS) is a cheap UK share that could thrive as the country’s population rapidly ages. Office for National Statistics data shows that the number of Brits aged between 65 and 84 rocketed 23% in the decade to 2018. It has been suggested that the over-65s could represent a quarter of the domestic population by 2050, too.

I also like this almost penny stock as its non-cyclical operations means it can pay big dividends during good times and bad. Incidentally its yield sits a shade below 5% for this fiscal year (to March 2022). I think XPS is a top buy despite the problems that its acquisition-based growth strategy could throw up. Such problems could include the business ultimately overpaying to build its position in its fragmented marketplace.

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But unlike so many of its peers, which collapsed as the global housing and construction market crumbled, Ashtead powered through. 

The returns since have been higher than anyone could have expected. Over the past decade, shares in Ashtead have produced a staggering total return of 45.2% per annum, turning every £1,000 invested into £41,654.

Bucking the trend

Management has steered the business carefully over the past decade, making select acquisitions to boost growth and being careful not to overstretch the group. 

Net debt has nearly tripled over the past five years, but shareholder equity has expanded faster, suggesting management is using debt carefully to fund value-creating acquisitions. Management has also prove that it is skilled at integrating acquisitions successfully. The group’s operating margin has increased by around 25% over the past five years as Ashtead’s increasing size has resulted in economies of scale.

It doesn’t look as if the business is going to slow down any time soon. At the beginning of September, the company announced a 22% increase in revenues for the quarter to the end of July, thanks to a jump in demand for equipment rental in the US. Profit before tax jumped to 23%.

This kind of growth is unlikely to last forever as Ashtead’s fortunes are tied directly to economic growth. However, in the past decade, the firm has shown the market that it can ride out all economic environments, and for this reason, I think it still has plenty of potential. Indeed, another downturn could actually be good news for it, as it will allow Ashtead to swoop on smaller, struggling competitors, and buy up growth at a knockdown price. And talking of knockdown prices, today the shares are changing hands for just 11.4 times forward earnings, to me that looks like a steal.

Tech small-cap 

At the other end of the growth spectrum, there’s Zoo Digital (LSE: ZOO). Unlike Ashtead, this company does not have a long track record of growth behind it, but I think it has a long runway for growth in front of it.

Zoo provides digital services for the global entertainment industry. As it is still in its early stages, it is not yet profitable, but it is getting there. In a trading update for the six months to the end of September, published today, the company revealed adjusted earnings before interest tax depreciation and amortisation (EBITDA) of $0.5m and a gross profit of $4.9m. For the full year, City analysts have pencilled in a net profit of $1.6m, and earnings per share (EPS) of $0.02. EPS year-on-year growth of 51% is expected for 2020. 

These numbers are impressive and hint at what the firm is capable of. The next few years will be fundamentally important for business. If it can maintain profitability, there should be a re-rating of the stock, as investors view the company through a different lens. 

That being said, as Zoo is still in its growth phase, it is a riskier buy than Ashtead. However, considering the company’s potential, I think the risk could be worth the reward over the long term.

The post Why I think this top FTSE 100 growth and income stock can help you retire early appeared first on The Motley Fool UK.

Growth story

Zoo Digital describes itself as a “leading provider of cloud-based subtitling, captioning, localisation and distribution services.” What that means in layman’s terms is that the group specialises in providing subtitling and dubbing services for content providers such as Netflix, which is a fast-growing market, given the rise in streaming services in recent years.

While the company’s subtitling services have powered revenue growth up to now, its dubbing services also look very interesting as the group has developed an innovative cloud-based platform which enables functions such as auditioning, recording and editing to be performed remotely from anywhere in the world. This could potentially disrupt the industry and the group stated in its full-year results that its dubbing services have opened up a “significant new axis of growth for the company.” So the story certainly looks exciting. But are the shares a good investment right now?

For the year ended 31 March, Zoo generated revenues of $28m, up 73% on the year before. That’s certainly a positive. Yet at the same time, the group reported a pre-tax loss of $5m, which demonstrates that it’s still very much an early-stage company. Looking at analysts’ forecasts, profitability is expected to improve this year. But the estimated earnings figure of 1.9 cents per share places the stock on a forward P/E of over 100, meaning that it’s priced for perfection. At that valuation, I’m going to sit on the sidelines for now. I do like the growth story here, but I’ll be keeping the stock on my watchlist for the time being.

Better value growth stock?

One stock that potentially offers more value right now (and one that I own myself) is cybersecurity specialist NCC Group (LSE: NCC). The company has had its problems in recent years after trying to grow too quickly through acquisitions. However, things appear to have stabilised, and with analysts upgrading their earnings forecasts for the group, now could be a good time to take a closer look at the shares. 

Full-year results released in mid-July showed that NCC has recovered from its recent growth issues. For the year to 31 May, revenue from continuing operations increased 8.3% to £233.2m. Adjusted basic earnings per share rose to 8.3p, up 34% on last year’s figure of 6.2p per share. Net debt was also reduced to £27.8m, down from £43.7m the year before.

Looking ahead, analysts expect the group to generate earnings per share of 9.2p this year which, at the current share price, places the stock on a forward P/E of 23.8. In a world in which demand for cybersecurity services is only likely to rise, and growth opportunities vast, I think that valuation is a fair price to pay for the company.

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