Every month, we ask our freelance writers to share their top ideas for growth shares to buy with investors — here’s what they said for February!
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Deliveroo
What it does: Deliveroo is one of the UK’s biggest food delivery services. It also has operations in across the world, such as Qatar, the UAE, and Hong Kong.
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By John Choong. Having fallen off its highs of £3.86, Deliveroo (LSE:ROO) shares are now trading below £1. Nonetheless, a move back to the pound mark might not be too far away when considering its accelerated growth prospects and better decision-making from management.
Although pulling out of key growth regions such as Australia and the Netherlands didn’t seem like the right move for a growing company, this has allowed Deliveroo to achieve EBITDA profitability this year, much sooner than expected. This is good news for an investor like myself as I’d rather see profits than poor user acquisition.
Consequently, the unicorn company delivered excellent results in its latest trading update, with gross transaction value (GTV), total orders, and GTV per order improving despite gloomy forecasts from analysts who were predicting a blood bath as a result of high inflation impacting discretionary spending. Pair all of that with a strong balance sheet and reasonably cheap price-to-sales multiples, it’s easy to see why I started a position.
John Choong has positions in Deliveroo.
Diploma
What it does: Diploma is a conglomerate made up of businesses focused on specialised industrial distribution.
By Stephen Wright. Most obviously, when it comes to growth shares, I’m looking for something that’s growing and is going to keep doing so. That’s why my growth stock to buy in February is Diploma (LSE:DPLM).
The company released a trading report last month. To me, it seems to indicate continued strong performance.
Over the last decade, the company has averaged 13% annual revenue growth. And according to its latest update, the top line is currently growing at 30% per year.
As a conglomerate, I’d expect a good amount of Diploma’s growth to come from acquisitions. But the amount of revenue growth from existing businesses was equal to the amount from acquisitions.
The company also also maintained strong operating margins. This indicates that its businesses are resilient even in a difficult macroeconomic environment.
Stephen Wright owns shares in Diploma.
Experian
What it does: Experian is a British technology company that specialises in consumer credit data.
By Edward Sheldon, CFA. Experian (LSE: EXPN) continues to generate solid growth. For the quarter ended 30 December 2022 (Q3 FY2023), the group generated total revenue growth of 7% at constant exchange rates. And looking ahead, it said that it expects to achieve total revenue growth of 8-10% at constant currency for the year ending 31 March 2023, along with “modest” margin accretion.
One reason I’m optimistic about Experian is that its data and analytics can help banks reduce loan losses. In its third-quarter results, the company noted that lender appetite for solutions that help understand loan affordability are increasing. Here in the UK, its ‘decisioning’ revenues were up 15% year on year in Q3.
Now, like a lot of growth shares, Experian has an above-average valuation. Currently, the forward-looking price-to-earnings (P/E) ratio is in the high 20s. I believe it warrants a premium valuation, however, as it’s a high-quality business with a strong economic moat.
Edward Sheldon owns shares in Experian.
Frontier Developments
What it does: Cambridge-based Frontier Developments develops and publishes video games for the interactive entertainment sector.
By Paul Summers. Buying when everyone else is selling can sometimes generate huge profits over the long term. This is why Frontier Developments (LSE: FDEV) is my pick of the growth shares for February.
Things are a bit bleak at Frontier. A profit warning arrived last month following disappointing sales over the Christmas period. Naturally, even the most dedicated gamers are tightening the purse strings at times like this.
This sticky patch might continue. However, the positives arguably outweigh the negatives.
Management has set a minimum expectation of revenue coming at “not less than £100m in FY23”. That’s lower than the previous year’s record of £114m but hardly a disaster. Frontier also looks financially solid.
Having tumbled over 60% in value in the last 12 months, the stock now trades at less than 10 times earnings. That could prove a bargain in time.
Paul Summers has no position in Frontier Developments.
IP Group
What it does: IP Group develops intellectual property-based companies via long-term partnerships with research universities.
By Charlie Carman. IP Group (LSE:IPO) focuses on two sectors. Its life sciences investments total £704.4m and account for 62% of the portfolio. Technology investments make up the remaining 38% at £334m.
Gene sequencing firm Oxford Nanopore Technologies is the company’s largest single position. Admittedly, a substantial haircut in Oxford Nanopore’s valuation since its 2021 flotation has weighed on the IP Group share price.
However, Oxford Nanopore’s recent trading update showed welcome signs of improvement. Full-year 2022 revenues grew across all customer groups.
In addition, IP Group’s cleantech investments look promising. The group owns a 27.5% stake in First Light Fusion, which is developing a new approach to inertial fusion. IP Group estimates the business could double in value to over $1bn by 2025.
Down 35% over 12 months, IP Group shares seem oversold to me. This disruptive company offers shareholders the possibility to benefit from breakthrough technologies with big potential. I’d buy these growth shares.
Charlie Carman does not own shares in IP Group.
Keywords Studios
What it does: Keywords Studios is the leading technical and creative talent provider to the largest video game studios worldwide.
By Zaven Boyrazian. Investing in the video games industry can be risky. After all, making a game requires a lot of financial resources — and for many studios, a flop can be disastrous.
That’s why Keywords Studios (LSE:KWS) is a far more interesting way to play this space. The company provides technical and creative services to the largest development houses in the world.
Whenever working on a new project, studios often rely on Keywords to supply the crucial talent needed. With a reputation for quality, the demand for Keywords’ services has steadily risen over the years. And the best part is, even if a finished game fails to meet sales expectations, Keywords still get paid.
As per the latest trading update, full-year revenue for 2022 is expected to be 32% higher than a year ago, with pre-tax profits increasing by 28%, well ahead of analyst expectations. While a slowdown in consumer spending might create some indirect short-term headwinds, the long-term potential continues to excite me.
Zaven Boyrazian owns shares in Keywords Studios.
Watches of Switzerland Group
What it does: Watches of Switzerland is an international retailer of the most prestigious and recognised luxury watch and jewellery brands.
By G A Chester. The mid-cap FTSE 250 index underperformed the blue-chip FTSE 100 by a wide margin last year. Yet many mid-caps have higher growth potential than the Footsie’s elephants.
One stock I’m particularly keen on right now is Watches of Switzerland Group (LSE: WOSG). Despite a continuing strong business performance through 2022, its shares fell more than 40% over the year.
I like the company’s longstanding, collaborative partnerships with top-tier luxury brand owners. These partnerships represent a barrier to new entrants to the market. And I like its growth prospects. It has a leading position in the UK, a growing presence in the US (it’s aiming to be the clear market leader there, too) and opportunities in Europe.
There’s a risk it may encounter setbacks in its expansion, but I’m encouraged by the continuing good execution of its growth strategy. I’m expecting it to report further progress in a trading update on 9 February.
G A Chester does not own shares in Watches of Switzerland.
