1 UK growth stock that could soar 81%, according to select City analysts

This investor takes a look at one under-the-radar growth stock that brokers in The City are bullish on. Is it worth considering?

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When we look back in a few years, I think this will prove to be a great time to invest in small-cap growth stocks. Many of these smaller UK firms are trading at low valuations, despite having tonnes of potential.

Looking ahead, investor sentiment could get a boost as inflation and interest rates fall. So I think now is an opportune time to consider snapping up UK small-cap stocks.

Analysts are bullish on this one

One that’s recently caught my eye is Kooth (LSE: KOO). This is a digital mental health provider with a market cap of just £114m.

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Since going public in 2020, the stock has risen 36%. However, its down 19% from a high reached three years ago.

On 17 September, Canaccord Genuity reaffirmed its ‘buy’ rating on the stock and issued a 580p share price target. On the same day, Berenberg Bank also reissued its ‘buy’ rating, with a 590p target.

If these are realised, they’d represent gains of up to 81% from the current 326p price. Naturally, this isn’t guaranteed to happen. But when there’s such a big discrepancy, my ears prick up.

Created with Highcharts 11.4.3Kooth Plc PriceZoom1M3M6MYTD1Y5Y10YALL2 Sep 202026 Sep 2024Zoom ▾Jan '21Jul '21Jan '22Jul '22Jan '23Jul '23Jan '24Jul '2420212021202220222023202320242024www.fool.co.uk

What does the firm do exactly?

Kooth works with the NHS, local authorities, charities, and businesses to provide digital mental health services to children and young people. It’s one of the largest and most trusted providers in the UK.

Last year though, Kooth won a contract with the California Department of Health Care Services worth at least $188m. It will offer digital mental health care to 13- to 25-year-olds across all 58 counties in the state until mid-2027.

In the first half, the firm’s revenue surged 179% year on year to £32.5m. This was driven by the expansion in the US, which now accounts for approximately 70% of total annual recurring revenue.

The gross margin expanded to 82.4%, up from 68.8%, while adjusted EBITDA was £7.8m. Post-tax profit came in at £3.9m, up from £0.5m.

While Kooth is growing nicely, it doesn’t have a long track record of profitability. This increases the risk to the investment case.

Mental health epidemic

Stepping back, this (sadly) seems like a large and growing market. Social media is leading to rising levels of anxiety and depression among young people.

According to the British Medical Association, the rate of people aged 17-19 likely experiencing a mental health disorder rose by approximately 150% between 2017 and 2022.

Shockingly, Kooth says that 22% of high school students in the US have seriously considered suicide in the past year.

These issues aren’t likely to go away in the digital age, which should result in rising demand for the company’s online mental health platform.

Source: The British Medical Association

My decision

There are a number of things I like here from an investment perspective:

  • Growing revenue, most of it recurring
  • Strong purpose at its core (robust ESG)
  • Strong balance sheet, with net cash of £14.9m
  • Likely expansion into other US states (it’s also won a contract in Pennsylvania)
  • Entering the $30bn Medicaid market

The firm is only just turning profitable, so the P/E ratio is of little use. But the stock is trading at about 1.7 times forecast sales. That’s very cheap for a growing business, in my opinion.

I’ll consider buying Kooth shares with spare cash in October.

Pound coins for sale — 31 pence?

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Ben McPoland has no position in any of the shares mentioned. 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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