Buy Hold Sell: 5 of the ASX's fastest-growing stocks

Growth stocks have been off to the races over the last few months, with the S&P/ASX 200 Growth Index rebounding 14% since hitting a low at the end of October 2023. Over that same time period, growth stocks like Megaport (up 52%), NEXTDC (up 44%), REA Group (up 28%), WiseTech Global (up 60%), and Lovisa (up 76%) - among many others - have all skyrocketed. 

While I am not so sure that there are many ways to skin a cat, there are many ways to measure growth - think sales growth, revenue growth, earnings per share growth, dividend growth, and more. 

So, Livewire's Ally Selby was joined by Regal's Jessica Farr-Jones and Spheria's Brittany Isakka for their analysis of three stocks with trailing 12-month earnings per share (EPS) growth of more than 100%. In this episode, you'll learn whether these stocks can continue to push earnings to the limit over the year ahead.

Plus, our guests also name an emerging growth darling within their portfolios that they are backing over the next 12 months. 

Note: This episode was recorded on Wednesday, 28 February 2024. You can watch the video, listen to the podcast, or read an edited transcript below.

Edited Transcript

Ally Selby: Hey, how are you doing? And welcome to Livewire's Buy Hold Sell. I'm Ally Selby, and today we're taking a look at some of the ASX's fastest growing stocks. These stocks have grown their earnings per share (EPS) by more than 100% over the past 12 months, so to find out if they can do it again, we are joined by Jessica Farr-Jones from Regal and Brittany Isakka from Spheria.

I should say that there are many metrics that you can use to measure growth and we're using a fairly rudimentary one at that. It's also backward-looking, but without further ado, let's get straight into it.

First up, we have DUG Technology, which provides software and hardware services to global technology and resources companies. Brittany, I'm going to start with you. Is it a buy, hold, or sell?

DUG Technology (ASX: DUG)

Brittany Isakka (HOLD): I'm a hold, Ally. I think the business has done a really great job growing revenue with its technology. However, its earnings are cyclical. They're tied to oil and gas exploration and I think any slowdown there could be a headwind for the business. It's also undergoing a significant amount of CapEx, which weighs on cash flow, and I think like many companies who undertake a big CapEx spend, they can blow out a budget.

I think, as well, just on valuation grounds, given the cyclical nature of their earnings, despite it being a tech business, it's not SaaS revenue, so it's project-based. Any fall in one project without another project coming on can lead to volatility in earnings. I'd want a little bit more valuation support, so that's why I'm a hold.

Ally Selby: Okay. It's had an amazing 12 months. Its share price is up around 170%. Over to you, Jess. Is it a buy, hold, or sell?

Jessica Farr-Jones (BUY): We're a buy. I agree with Britt completely that a large part of its revenue comes from a cyclical part of the market, which is doing seismic processing for oil and gas companies. However, what we saw is demand in that industry fell off a cliff during COVID and actually, it's come out really strong on the other side and we believe it can continue for many years.

There are also two key reasons why we think that cyclicality is less of an issue. Importantly, they just entered the Middle East market and they currently have seven tenders in the Middle East, and these are with some of the largest oil and gas companies in the world. So we think looking forward, over the next couple of years, that revenue can accelerate materially.

The other reason we really like it is they've spent the last eight years developing this really innovative software called MPFWI - Multi-Parameter Full Waveform Inversion.

They are the global leader in this software. No one else around the world, in terms of their competitors, is offering it. It's incredible because often processing this seismic data can take 12 months. This new technology allows them to process it in five weeks. So it's a truly game-changing technology that we believe over the next couple of years will enable them to take very material market share. And it's only trading on about 8-9 times FY25 EBITDA. So we still firmly believe it's a great founder business with truly market-leading technology.

Viva Leisure (ASX: VVA)

Ally Selby: Next up today we have Viva Leisure. It's a fitness facility operator and fitness is definitely in vogue in 2024. Jess, staying with you, is it a buy, hold, or sell?

Jessica Farr-Jones (BUY): We're a buy on Viva. It's a founder-led business that has executed exceptionally well. Especially in what's been a difficult environment for the consumer with high interest rates. They've managed to continue to grow revenue and earnings really strongly over the past couple of years.

We believe that this organic revenue growth is going to be supplemented by greenfields and also acquisitions. They're basically the only acquirer in the gym space in Australia at the moment, and that's going to fuel more and more revenue and earnings growth. They're also doing things like refurbishments of existing gyms, which are achieving an 80% return on invested capital. Great management team, and they're only trading on 4 times FY25 EBITDA, so we think it's a buy.

Ally Selby: Its share price has risen around 10% over the past year. Brittany, over to you. Is it a buy, hold, or sell?

Brittany Isakka (SELL): I'm actually a sell, Ally. I agree with Jess. It's got some great tailwinds coming out of COVID. Everyone's really loving the gym and running, but I think the industry's super competitive. There are lots of niches and fads that go in and out with training. We saw the demise of F45. HIIT training was in, and now it's not. It's a super capital-intensive business. There's a constant need to invest in equipment in order to gain new members. And churn is really high as well. Members come in and out. I think it doesn't generate the best returns for a competitive industry and it has a bit of debt on the balance sheet as well, which we don't like for a business of that nature, so for us, it's a sell.

Tyro Payments (ASX: TYR)

Ally Selby: Next up today, we have Tyro Payments. It was a growth darling a few years ago, but now it's really out of favour with investors. Brittany, can Tyro turn the ship around and is it a buy, hold, or sell?

Brittany Isakka (HOLD): It's a hold. I'm sitting on the fence because I agree with you. It has had a tough 12-18 months and that's been a little bit consumer-related. They've got consumer exposure through their terminals, hospitality and retail. They've had management change in late 2022. As well as that, there's been some competitive pressures so the business has had some headwinds.

I think on a valuation basis, it doesn't look expensive. It's trading on 1 times revenue. However, I think for the business as well, it has also started to generate profit and earnings, which it wasn't - hence the [EPS] growth. For us, we'd want to see another period or two of positive operating cash flow and earnings and the top line stabilise. They've had a bit of churn. I think if we saw that stabilise and profitability continue, we'd be more positive on the name, so we're a hold.

Ally Selby: Its share price has fallen around 38% into the red over the last 12 months. Jess, over to you. Is it a buy, hold, or sell?

Jessica Farr-Jones (HOLD): I think this is the first one we agree on. We're a hold as well. We do think it's a good business, but at the moment, there are both positives and negatives. On the positive side, as Brittany alluded to, it's not too expensive. It's trading on around 10 times EBITDA. However, they do have quite high CapEx associated with terminals and software development, so it's on more like 30 times P/E at the moment, which is still pricing in a bit of that structural growth story of taking share away from the banks.

What we saw last year was a takeover offer from private equity for the company. We believe that it still remains a takeover target from private equity or potentially a strategic [takeover] as well. There are costs that can be taken out. They could potentially get rid of the ADI banking license or they could get rid of the switch infrastructure and make it a much more capital-light business with a smaller cost space.

On the negative side, I agree with Brittany. Unfortunately, this is a stock that has sold off recently because there have been question marks around the top-line growth and merchant churn. It's an example of one that until we can see growth return in that dynamic and competitive pressures ease, it might be hard. It's also becoming more commoditised and there's technology risk.

Guest picks

Ally Selby: We asked our guests to bring along one growth stock they're liking today. Jess, what have you brought for us?

Gentrack (ASX: GTK)

Jessica Farr-Jones (BUY): A growth stock that we really like and which Regal is a substantial shareholder in, is a software group called Gentrack. They offer mission-critical billing and CRM software for energy companies and water utilities. They also have a second division that does ERP software for over 120 airports around the globe.

They've been compounding both revenue and earnings very strongly since the new CEO took over a few years ago. He has a great track record of under-promising and over-delivering. We saw three beats last year to FY23 guidance and the results, and we think that they can beat the guidance they have in the market for FY24 again.

Energy companies are going through this really interesting period at the moment of needing to revolutionise their software stacks as a result of the renewables and electrification theme. We think that Gentrack is really well-placed. They're taking share away from competitors such as Oracle and SAP and their new generation software is being priced 50-150% higher than their old generation software. So we think this is one of the key reasons why they were able to grow ARR last year by 51% organically, and we think that that strong growth can continue.

Ally Selby: Okay, over to you Brittany. You didn't have any buys in there today. What stock are you actually buying right now?

Adore Beauty (ASX: ABY)

Brittany Isakka (BUY): One we like is Adore Beauty. They're an online, pure-play, beauty retailer. What we really like about the business is it has a massive customer base. It's got over 800,000 customers. 80% of their revenue is actually generated from returning customers, which shows you the stickiness and the loyalty of the customers.

They've had some headwinds coming out of COVID. They had massive growth during COVID. They're comping some of that, but they've now returned to growth and we think the online beauty market in Australia can grow significantly ahead of bricks-and-mortar offerings. The business has a net cash balance sheet. It's generating cash flow and earnings now and trades on 0.5 times revenue, so you're buying arguably a growth business on a value multiple. Comp in the US, Ulta Beauty, trades on 2.5 times revenue. So, you can see there's massive amounts of value in the business. It has really great growth and we really like Adore Beauty.

Ally Selby: Well, I hope you enjoyed that episode of Buy Hold Sell as much as I did. If you did, why not give it a like? Remember to subscribe to our YouTube channel. We're adding so much great content like this every single week.