The Alternative Investment Market (AIM) is London Stock Exchange’s junior market. It’s home to many small and medium-sized companies with ambitions to grow into much bigger businesses. This makes it a perfect hunting ground to find UK shares that could explode in the years ahead.
With this in mind, here’s a growth stock listed on AIM I’d buy today.
A stock with explosive growth potential
The company is Team17 (LSE: TM17), a video games developer and creative partner for third-party gaming studios. Before I dig into the company, the video gaming industry is expected to grow considerably. According to Statista, the global market will be worth $269bn in 2025, up from $178bn in 2021. I view this as a big tailwind for Team17 if it can capitalise on the growth in the wider industry.
A major attraction for me with Team17 shares is the company’s financial metrics. Indeed, the business is able to achieve an operating margin over 30%. Not only this, but Team17 also generates double-digit returns on its capital base. With financial ratios so high, there’s a much better chance for excellent shareholder returns as the company continues to grow.
Team17 also released a trading update in January which was encouraging. Management said the company is continuing to trade above their expectations for the six months to 31 December, which completes a “solid performance in 2021”.
The full-year performance for 2021 does look good, in my view. Revenue is expected to grow over 9%, which should translate into a pre-tax profit growth rate of 17%. Things look even better next year though. Analysts are expecting revenue to grow by 24% in 2022, with an increase in pre-tax profit by 22%.
Risks to consider
Even though the video game industry is expected to grow, it’s still a competitive market. One new and popular game from another developer could steal market share from Team17. For example, games such as Fortnite and Minecraft were huge successes, and could threaten sales of Team17’s games.
Another risk for me to consider is that the firm has been acquisitive of late. Only recently, the company announced it was buying Astragon Entertainment for £83m. It’s to be funded by a placing of shares to raise gross proceeds of £80m. Astragon is a developer and publisher of simulation games, so I do view this as a good fit for Team17. However, there’s never a guarantee that acquisitions will be successful. The cultures of the different businesses may not blend well, or the acquiring company might overpay. It’s certainly something to monitor if Team17 continues on its acquisition strategy.
A UK share to buy
On balance, I think Team17 is a buy for my portfolio. It’s not without risk, just like any investment. But I think the potential return over the years ahead outweighs the risks at hand.
The post UK shares: 1 growth stock on AIM I’d buy today appeared first on The Motley Fool UK.
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Dan Appleby owns shares of London Stock Exchange. 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.
