Will this promising growth stock avoid the IPO curse?

Businessman pulling out wooden brick from toppling stack

Last week, the latest set of results from game developer and publisher Frontier Developments weren’t exactly well-received by a predictably myopic market. For those prepared to look beyond the next few months, however, I suggested the shares could be something of a bargain.

Can the same be said about Frontier’s industry peer and creator of “indie premium video gamesTeam17(LSE: TM17)? And will the company be able to dodge the IPO curse — the tendency for newly-listed companies to disappoint after initial enthusiasm has waned?  

Up over 4% in value in early trading, the market would appear to be giving a tentative ‘yes’ to both questions.

On track

Representing the first real chance for many to begin forming an opinion on the company, today’s maiden interim numbers for the six months to the end of June were always likely to receive attention.

Hailing a “record performance”, revenue rose 48% to £15.4m with adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) increasing 36% to £4.9m. Cash flow from operations soared by a little under 275%. 

Confident in meeting expectations for the full year, Team17 expects revenue to further improve in H2, partly driven by the release of new products (Overcooked 2 hit shelves last month). Gross margins are also expected to rise.

Joining AIM back in May following a “significantly oversubscribed fundraising” — the proceeds of which (£107.5m) will be used to repay debt, incentivise employees and grow the company’s profile — Team17’s stock rose to as high as 280p a pop back in late July, only to sink back to around its IPO price before today. Given that all appears to be going to plan, a re-test of previous highs isn’t out of the question.  

As is to be expected, however, being part of an industry that has become a firm favourite with investors over the last couple of years means that Team17’s stock isn’t cheap to acquire. Already pushing 28 times forecast earnings before today, any prospective owners will need to be confident that the company can deliver on its growth ambitions. So far, so good.

Foot in mouth

As mentioned, investing in a newly-listed company doesn’t always work out. Having plummeted in price from 265p a share last December to a little over 32p today, trainer retailer Footaslyum(LSE: FOOT) has already cost its owners an arm and a leg.

I’ll confess to becoming interested in the stock when it pretty much halved in price back in June. Since then, however, it’s become apparent that any recovery is going to take far longer than expected.

As my Foolish colleague Peter Stephens wrote earlier this month, Footasylum continues to struggle in what remain tricky conditions for most retailers with a high street presence. With earnings now expected to be firmly down on those reported in the previous financial year, things could easily get worse before they get better.

Hindsight is a wonderful thing, particularly in the stock market. Nevertheless, Footasylum’s woeful performance to date serves as a reminder that no investment is ever risk-free. Although the continued downward pressure on the share price should generate interest from value investors over the next few weeks, I think it would be a mistake to buy at the current time, particularly as broker Peel Hunt has already cut its target to as low as 22p.

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Paul Summers has no position in any of the shares mentoned. 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.

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