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.

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.

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.

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.

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.

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.

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.

Movements like that have the potential to win or lose investors a fortune, and depending on individual buy and sell decisions, I’m sure that fortunes have been won or lost on this volatile stock. There’s oil in the ground, but the big question is, can the company get it out?

A long and winding road ahead

In last month’s interim report covering the trading period to 31 March, chairman Stephen Sanderson said he is “very confident” that the firm’s comprehensive long-term testing campaign will “provide the necessary data to fully assess Horse Hill’s Portland and Kimmeridge commerciality and help move the project towards timely production in 2019.”

Maybe the company’s oil finds will prove to be commercially viable, but the directors’ language sounds to me like they are bedding down for a long and grinding process in order to establish that. Meanwhile, the firm has no earned-income and during the period raised £10m in a convertible loan note, of which £1.75m is outstanding. On top of that, a further £5.5m came in from institutional investors via a share placing after the period ended. Let’s hope that UKOG can commercialise its assets and get them earning cash inflow before existing investors are diluted into oblivion. However, I’m avoiding the stock and would rather take my chances with Zoo Digital Group (LSE: ZOO).

The company is generating fast-growing revenue by providing technology and services to producers of TV series and feature films so that their content can be subtitled and dubbed in any language and prepared for sale with online platforms such as Amazon, iTunes, Google and Hulu. The company claims that “this allows Zoo’s clients to leverage their original content to reach audiences worldwide.”

Building a competitive advantage

That may sound like a commodity-style business with little to differentiate Zoo’s services from those provided by other firms, but it reckons its strategy is to develop and employ “innovative,” proprietary cloud computing systems that “deliver significant competitive advantage and clearly differentiate the company from other providers of similar services.”

Today’s full-year results show good progress. Revenue increased 78% compared to the year before to $28.6m, adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) rose 35% to $2.4m and adjusted profit before tax shot up 400% to $0.5m. There’s clear evidence in the figures that Zoo is edging towards meaningful profits from its escalating revenue.

Chief executive Stuart Green said in the report that Zoo is becoming a “significant player in the media localisation market,” and with the recent introduction of dubbing services the company has achieved a “key milestone on our journey towards becoming a one-stop shop for all media localisation and digital packaging services across all languages.” I think Zoo Digital is one to watch closely with a view to buying some of the company’s shares.

Of course, it’s not the only growth stock that could generate high returns in the long run. Reporting on Monday was a company which appears to offer growth at a reasonable price.

Improving outlook

That’s Zoo Digital (LSE: ZOO), the provider of localisation and digital distribution services for the global entertainment industry. It released a trading update that showed a strong performance in the first half of the year has continued into the second half. Revenue is expected to be up from $16.5m last year to $28m in the current year. Furthermore, EBITDA (earnings before interest, tax, depreciation and amortisation) is expected to be ahead of market expectations.

Encouragingly, localisation services have continued to grow during the period. They’re now expected to represent around 70% of total revenue, while continued investment in its services is also expected to boost earnings growth over the medium term.

In fact, Zoo Digital is forecast to post a 280% leap in its bottom line in the next financial year. Even after a rise in its share price of 585% in the last year, it trades on a price-to-earnings growth (PEG) ratio of just 0.2. This suggests it could deliver further capital growth over the medium term.

Changing prospects

While the near term for Imperial Brands may be more challenging as it adapts to changes in demand for tobacco products, its long-term future appears to be positive. Consumers appear to be embracing less harmful methods of nicotine delivery, such as e-cigarettes. This trend looks set to continue as people become more health conscious and could mean that there is high growth potential in next generation products.

With Imperial Brands having a strong position in the next generation products space following its acquisition of blu, it seems to be well-placed to generate rising levels of profitability. This could prompt a higher dividend, which may prove to be a further growth catalyst in the long run. With inflation moving higher and the stock having a dividend yield of 7.3%, it appears to offer a solid income outlook. And since dividends are covered 1.4 times by profit, they seem to be highly sustainable.

Certainly the prospects for the tobacco industry are relatively uncertain. But in the long run companies such as Imperial Brands could offer high growth, while a wide margin of safety suggests now could be the right time to buy the stock.

I’ll also look at the outlook for oil and gas group IGas Energy (LSE: IGAS). With the price of oil rising and a successful refinancing under its belt, is now the right time to take a fresh look at this firm?

Follow the smart money

IGas’s oil and gas assets fall into two categories. The company has a number of conventional UK onshore oil and gas fields, producing about 2,250 barrels of oil per day. But the big hope for future growth is shale gas, where IGas has one of the largest positions in the UK.

One clue that these assets might have potential is that energy industry specialist Kerogen Capital contributed £29m to the group’s refinancing, giving it a 28% stake in the firm. Kerogen is also a major backer of North Sea success story Hurricane Energy, suggesting to me that the company’s stock picks could be worth following.

As a result of several partnership deals, IGas is set to benefit from up to £183m of funded exploration work by its partners. Although the prospects for UK shale gas are still highly uncertain, the company is now well positioned to benefit if early exploration efforts are successful.

In the meantime, rising oil prices should improve the cash generation of the firm’s conventional oil assets. With operating costs of just $28.50 per barrel during the first half, the current Brent Crude price of about $60 should ensure the group continues to generate cash to fund its ongoing operations.

IGas isn’t without risk, but at under 80p per share, I believe the stock could be a speculative buy.

A surprise winner in 2017?

Tech firm Zoo Digital Group (LSE: ZOO) specialises in providing dubbing services for television and movie content. So if you want your film to be voiced and subtitled in a different language, for example, Zoo Digital could help. According to the group’s website, customers include Sony Pictures and Universal.

The shares have risen by a staggering 511% already this year, and now trade on a demanding 2017/18 forecast P/E of 100. So does the group’s current growth rate justify this premium valuation?

Half-year results published on Monday show that revenue during the six months to 30 September rose by 63%, to $12.7m, compared to the same period last year. Adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) rose by 34% to $1.3m over the same period. Another piece of good news is that the group has reduced its dependency on its largest customer from 47% of revenue to a safer 28%.

I believe this could be a successful growth business. My main concern is that profitability doesn’t seem to be improving as it expands. The firm’s half-year operating profit of $413,000 gives an operating margin of just 3.2%. That’s actually lower than the 4% figure for the same period last year.

Zoo is spending money on expanding its capabilities, which makes sense to me. But I believe profit margins need to rise quite soon to justify the stock’s current valuation. I’d need to do more research before deciding whether to invest.