One has doubled in value since our tip, and the other is up 100% in 2020, but some expect more upside.
Buyers in recent days have included directors of both AIM-traded companies, with Naked Wines CEO Nick Devlin picking up £42,000 of shares and the new chief financial officer at digital gaming firm Team17, Mark Crawford, purchasing a further £10,000 worth of stock.
They made their purchases despite Naked Wines shares trading 115% higher than in March at 439.5p and Team17 being some 66% stronger over the same period at 716p.
The two dealings, disclosed by Naked Wines on Tuesday, show Devlin bought at 420p and 438.79p, on top of £40,000 worth of shares in August and September at around 456p.
The wine subscription business, whose split in December from the retail operations of Majestic Wine looks well timed, now has a much bigger customer base after lockdowns helped revenues from new sign-ups rise 185% in the four months to July.
Devlin pointed out recently that Covid-19 had been an “inflection point” for the online wine market as buyers recruited during the pandemic become repeat customers.
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In the United States, the company described the crisis as doing 20 years work in one month in terms of channel shift. Online sales were 20% of the total by mid-April compared with 5% before the pandemic.
Naked only launched in the United States in 2012, with the country now its largest territory thanks to annual sales of £90 million in the last financial year. Not only is the US wine market large with US$40 billion of off-trade sales, it is one of the least efficient as consumers endure high prices and wine makers face various distribution challenges.
Analysts believe Naked is well placed to capitalise by connecting consumers and winemakers directly. Broker Liberum said: “If as we believe, structural barriers to online wine retailing are breaking down in the US, it would bode very well for long term value creation.”
This month, another broker, Jefferies, initiated coverage with a ‘buy’ recommendation and 600p target price, describing the pandemic as a tailwind and an enabler rather than key investment focus.
The broker forecasts a three-year compound growth rate of 25% a year in the profit contribution from repeat customers. And while reported earnings are likely to be constrained for a while yet, it believes that Naked is building a much bigger and more valuable asset.
The company, founded 12 years ago in the midst of the financial crisis, reduced losses in its most recent financial year by 46% to £5.4 million. It served almost 600,000 customers in the US, UK and Australia over that period, giving them access to 200 winemakers and more than 1,000 wines in 19 countries.
A very profitable game
The lockdown has also benefited digital gaming, with shares in Keywords Studios (LSE:KWS), Frontier Developments (LSE:FDEV), Codemasters (LSE:CDM), Sumo Group (LSE:SUMO) and Team17, all sharply higher since March as the stay-at-home effect of Covid-19 creates new gamers and prompts existing fans to spend more.
As Team17 targets the indie market and has been around for three decades, it boasts a loyal fanbase across many genres and platforms. Its portfolio now comprises over 100 games, with the Worms franchise still the best known after celebrating its 25th anniversary this year. The company partners with independent developers worldwide, while also developing its own games in house.
The tailwinds boosting Team17 were shown in better-than-expected interim results in September, when “extraordinary one-off circumstances” helped revenues jump 28% to a record £38.8 million as adjusted earnings per share grew 25% to 8.5p.
The results prompted City firm Berenberg to upgrade its full-year forecasts by almost 30%, with confidence further boosted by several games releases due in the current half of the year.
Exposure to companies like Team17 doesn't come cheap, with the stock now trading ahead of its peers on a forward price/earnings multiple of more than 42 times. It only listed on the stock market in 2018 and has more than doubled in value since last December, when interactive investor's Lee Wild chose the company as one of his three speculative growth tips for 2020.
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Broker Stifel believes the premium rating is justified given its strong track record, with Team17 the fastest-growing stock in the video games space over the past three years. The broker recently increased its price target from 750p to 840p, which it said allowed room for positive surprises from organic growth and the strong balance sheet.
Citi thinks that a net cash position of £50 million and a growing and highly fragmented market raises the prospect of Team17 making bolt-on deals for enhancing capabilities and capacity. The bank has a price target price of 880p, whereas Berenberg is at 800p.
Finance boss Crawford bought his shares at 717p, having also acquired £30,000 worth of shares at 560p a couple of days after his appointment to the board was confirmed in April.
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