Why this double-digit growth stock is set to soar 50%+
Today's trading update from gaming operator 32Red(LSE: TTR) shows that 2016 was a record year for the business. Its net gaming revenues increased by 28%, while its performance since the end of the year has also been impressive. While its shares may have fallen by 10% in the last year and been a disappointment, now could be the right time to buy them ahead of a potential 50%-plus capital gain.
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Improving performance
32Red's rising revenue was driven by a combination of healthy organic growth in the core 32Red business, as well as a full-year contribution from the Roxy Palace business that was acquired in July 2015. Furthermore, its Italian division has moved into profit, which is in line with expectations. And with revenue up 21% in the first part of the current year when compared to the previous year, it seems to be enjoying continuing positive momentum.
Outlook
The outlook for the gaming industry is somewhat mixed. There has been a significant amount of consolidation in recent years, with William Hill(LSE: WMH) for example acquiring Grand Parade last year for £13.5m. William Hill was also the subject of a takeover attempt as companies within the sector have sought to merge their entities in order to deliver improving size and scale benefits in what has become a highly competitive industry.
Against this backdrop, 32Red's forecasts are exceptionally impressive. In the current year it's expected to record a rise in its bottom line of 50%, followed by further growth of 20% next year. This puts it on a price-to-earnings growth (PEG) ratio of only 0.4, which indicates there's significant upside potential. In fact, if 32Red continues to trade on the same price-to-earnings (P/E) ratio as it has today (14.4) and delivers on its forecasts, its shares could rise by over 50% in 2017/18. That rating of 14.4 doesn't seem excessive given its long-term outlook, so its share price could rise to over 200p.
Relative value
32Red's growth prospects dwarf other gaming stocks such as William Hill. The latter is expected to record a rise in its bottom line of 14% this year, followed by 8% next year. This puts it on a PEG ratio of 1.3, which indicates it's also a sound long-term buy. However, the potential rewards on offer are clearly much lower than for its smaller sector peer, which suggests 32Red is the more enticing buy.
William Hill is a larger company and has greater diversification and arguably a lower risk profile. However, 32Red's wide margin of safety means that its shares should perform well on a relative basis over the medium term. Given the strong start to the current year, it would be unsurprising for them to reverse their fall over the last year and if the business is able to deliver on its forecasts, major gains appear to be on the cards for the company's investors.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
