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Rolls-Royce Holdings (LSE: RR) has had its fair share of problems over the past two years. The misfortunes of the travel industry due to Covid-19 have smashed profits and caused the business to rack up enormous debts. The Rolls-Royce share price is down around 50% since the start of 2020 as a result.

Mass vaccination rollouts have fuelled hopes of a recovery in the aviation industry more recently. And as a consequence Rolls-Royce’s share price has sprung 19% higher over the past 12 months. But a case can still be made that the engine manufacturer remains too cheap at current levels of 125p.

Why? Well City analysts think Rolls-Royce’s profits will soar 210% year-on-year in 2022. This leaves it dealing on a price-to-earnings growth (PEG) ratio of 0.1. A reading below 1 suggests that a stock is undervalued considering its growth prospects, according to investing theory.

Reasons to buy Rolls-Royce shares

Fans of Rolls-Royce will argue that the skies are much clearer for the FTSE 100 firm looking ahead. Broker projections that annual earnings will rise an extra 5% in 2023 lend extra weight to hopes of a steady recovery.

In a key litmus test for the aviation industry aeroplane orders are beginning to rise strongly. Boeing announced last week it had chalked up 909 gross jet orders in 2021. That’s double the number the US planebuilder recorded in 2020 and 2019 combined. As one of the industry’s leading engine builders this is naturally excellent news for Rolls-Royce.

I also believe Rolls-Royce’s increasing focus on environmentally-friendly technologies could pave the way for big profits. Its plans to build a swathe of small-scale nuclear reactors across the UK will help the government to meet its emissions targets. It will also provide a bit more strength through industry diversification (in other words reducing the company’s reliance on the cyclical aviation industry).

The company is also creating less-dirty engines for aeroplanes and other vehicles. Its UltraFan plane engine, for example, is 25% more fuel efficient than a first-generation Trent engine.

On the other hand…

Rolls-Royce is clearly in a better place than it was a year ago. But I still have nagging doubts about investing in the company myself. It’s one of the UK’s most enduring engineering success stories, though outside circumstances mean Rolls-Royce is now saddled with debt (net debt stood at almost $5bn in June).

These massive debts could significantly hamper the company’s growth plans. They’ll be even more problematic if the Covid-19 crisis drags on and fresh travel restrictions ground planes again en masse. I can envisage Rolls-Royce adding to its debts or even tapping shareholders for more cash in this scenario just to keep the lights switched on.

The Rolls-Royce share price is cheap, sure. However, I believe this reflects the significant near-term risks facing the FTSE 100 firm and its buckling balance sheet. There are plenty of other cheap UK shares I’d much rather buy today.

Royston Wild 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.

Key points

• Revenue has risen by 50% per year since 2018
• Darktrace is performing better than expected since IPO
• Metaverse growth likely to increase demand for advanced cybersecurity services
• DARK’s AI technology appears to offer services not available elsewhere

The Darktrace (LSE: DARK) share price has fallen by over 50% since October. I think this sell-off may have gone too far. Although I’m normally cautious about investing in loss-making tech stocks, I’m excited about the growth potential of this Cambridge-based firm.

Huge growth potential

One key thing I look for with new tech stocks is a strong growth rate. These businesses often look expensive when they’re still growing, but profits can rise very quickly once they reach a certain size.

Darktrace has generated average revenue growth of 50% per year since 2018. The company appears to be on track to maintain that impressive record this year.

Revenue rose by 50% during the six months to 31 December, compared to the same period in 2020. Customer numbers were up by nearly 40% during the half year, while all-important recurring revenue rose by 45%.

I love to see recurring revenue in a tech business, because it often means that customers will become hooked on the service and will continue to renew their subscriptions for many years.

Are Darktrace shares a sure thing?

Fast-growing tech stocks always carry some risks. One obvious concern is that Darktrace shares remain expensive by normal metrics. At around 415p, the stock is priced at seven times forecast revenue for 2021/22. Analysts expect Darktrace to report a loss for the 2022 and 2023 financial years. If growth stalls, I’d expect the stock to crash.

The company’s historic association with tech entrepreneur Mike Lynch is also a niggling concern. Mr Lynch is currently fighting extradition to the US on fraud charges relating to a previous business.

However, he’s no longer thought to have any involvement with Darktrace, except as a shareholder.

In the meantime, I believe that the market for the firm’s services is about to get much bigger.

Why I think demand could explode (hint: the metaverse)

The last few years have seen an explosion in cyber crime, such as ransom attacks and data theft. I think it’s fair to say that many companies are only just beginning to understand how serious the risks are to their business (and to their bank accounts).

Most businesses currently rely on traditional cybersecurity products. These compare online threats to a known set of rules. They work well — up to a point. But I think there’s likely to be strong demand for more intelligent services that can understand all network activity and learn to recognise potential threats. This AI-based functionality is at the heart of Darktrace’s offering.

Over the next few years, I expect many organisations will start using AI-based systems like Darktrace alongside conventional systems, for maximum protection. Meanwhile, the growth of the metaverse is likely to see even more of our business and personal data move online.

I think that demand for advanced cybersecurity products will only increase from now on.

If I’m right and Darktrace can continue to deliver on its growth forecasts, then I think the share price could perform strongly in 2022 and beyond. I’m considering Darktrace as a speculative buy for my portfolio.

Roland Head 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.

The UK stock market has many opportunities, yet sometimes the best growth stocks are located internationally. These past couple of months haven’t been kind to US growth stocks, with many seeing their prices tumble.

But has this actually created fantastic buying opportunities for my portfolio? Let’s explore two potential ‘monster’ investments for the long term.

A future king in e-commerce?

The rising popularity of online shopping today is hardly a secret at this stage. And that’s why Etsy (NASDAQ:ETSY) has caught my attention. Instead of competing directly with other e-commerce giants like Amazon or Shopify, this business focuses on the market niches most tend to ignore. I’m talking about the artisans, crafts, and vintage-goods segments.

Looking at its share price in recent months, it may not seem like things are going well. After all, this growth stock is down almost 50% since late November. But when looking at the underlying business, some exciting progress emerges.

The group has recently made acquisitions that add exposure to the social commerce market. According to Grand View Research, this represents a potential $3.4trn industry by 2028. And given Etsy is currently only a $20bn company, the room for growth seems explosive.

The rising level of competition, and steady recovery from the pandemic, could potentially lead to a slowdown. In fact, fears of growth stagnating seem to have caused the stock to plummet recently. While there is some merit to this concern, I personally believe Etsy is in a strong position to overcome these challenges. Therefore, to me, the falling price looks like an excellent buying opportunity for my portfolio.

Growth stock behind the pharma industry

Veeva Systems (NYSE:VEEV) has seen a similar tumble to Etsy in recent months, bringing its 12-month performance to a disappointing -17% return. The company provides a cloud-based customer relationship management suite for the pharmaceutical and biotechnology industries. But the platform goes beyond the basics, with additional tools for clinical data analysis, regulatory compliance, and trial evaluations.

With demand for such services skyrocketing in the race for a Covid-19 vaccine, Veeva’s revenue jumped 33% between January 2020 and 2021. What’s more, looking at its half-year report, revenues have continued to grow by an impressive 29% versus analyst expectations of 25%. In my experience, a company that can consistently beat expectations is the hallmark of a potential monster growth stock.

The complexity of the drug development industry seems to have created organic barriers to entry against disruptive start-ups. This has proven to be quite valuable in staying on top. But it’s also a double-edged sword. With so many pharmaceutical companies relying on Veeva’s technology, clients could leave en masse if its compliance solutions fail to keep up with changing regulations. The same applies to its analytical toolkits. Retaining customers could become far more challenging if a competitor can provide better technology.

So far, Veeva Systems seems to be thriving, despite what the share price would indicate. As such, I believe now could be the perfect time to increase my position within this growth stock.

Zaven Boyrazian owns Etsy, Shopify, and Veeva Systems. The Motley Fool UK has recommended Etsy, Shopify, and Veeva Systems. 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.

With the deadline for my Stocks and Shares ISA approaching, I’m on the prowl to find the top UK shares to buy right now. But sometimes, the best companies are those already in my portfolio. With that in mind, let’s take a look at two that I think have tremendous long-term potential.

A future fintech superstar?

When it comes to doing international business, fluctuating currency exchange rates can significantly impact the bottom line. Meanwhile, moving large quantities of money across borders through standard methods like a wire transfer is both slow and expensive.

Alpha FX (LSE:AFX) is looking to change all that. By providing its services and expertise on a pay-as-you-go cost structure, the group has been able to cater to businesses of all sizes. That’s proven to be quite advantageous over larger financial institutions offering similar services that are often inaccessible to smaller enterprises.

Looking at the latest half-year report, revenue growth is exploding. Total sales over the first six months of 2021 came in at £34.2m versus £18m the year before. That’s a 90% jump! So it’s hardly surprising that the shares of this UK business are up 55% over the last 12 months.

As with any investment, especially growth ones, there are some risks to consider. Foreign exchange risk management is a complex process. And if a mistake is made, it could have a severe impact on a client’s profits. Needless to say, I doubt a customer would stick around if that happened. Meanwhile, with new fintech innovations popping up, its enterprise-scale international payment solution may soon face some sizable competition.

Having said that, I believe the risks are worth the potential reward. So, I’m definitely considering adding more shares of the UK company to my Stocks and Shares ISA in 2022.

Can these UK shares make a comeback?

One British stock that hasn’t been a stellar performer in my portfolio over the past year is Learning Technologies Group (LSE:LTG). The company provides a suite of remote learning tools for employers to train their staff from anywhere in the world.

In 2020, a remote learning solution was unsurprisingly in high demand because of the ongoing pandemic. Unfortunately, there were some initial disruptions surrounding new project launches. However, it seems those problems have been largely resolved. Looking at the latest half-year results, revenue has grown by 29% over the first six months of 2021.

Some 7% of this growth originated from organic sources. The rest came from acquisitions, which the company has a habit of making. Bolt-on acquisitions can be a source of long-term value creation, but there’s always the possibility that future performance doesn’t deliver on expectations. That’s why seeing organic growth start to materialise is encouraging in my mind.

There are some concerns that the demand for remote learning solutions will suffer once the pandemic ends. While I think there is some merit to this fear, shares of this UK business were thriving long before Covid-19 turned up. And I believe they can continue doing so long after the virus is gone. Therefore, I’ll personally be using the recent drop in the stock as a buying opportunity for my ISA.

Zaven Boyrazian owns Alpha FX and Learning Technologies. The Motley Fool UK has recommended Alpha FX and Learning Technologies. 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.

I’m always on the lookout for shares that can double my money. For this, I look for strong profit and revenue growth, modest valuations in comparison to peer companies and large sector growth. Airtel Africa (LSE: AAF) seems to fit all these criteria, and despite several risks associated with the company, I feel that this FTSE 250 stock has the potential to boost my returns. Here’s why.

What does Airtel Africa do?

Airtel Africa is a telecommunications company that operates in 14 countries in Africa. It also operates in mobile money, a sector which is extremely unpenetrated within the continent.

The firm has managed to deliver very strong growth over the past few years. Indeed, in the FY19 results, the company recorded pre-tax profits of $348m, yet in the first half alone of FY22, it has already managed to deliver pre-tax profits of $567m. For the full year, pre-tax profits are expected to reach at least $817m, a 135% increase from two years ago. Pre-tax profits in FY23 are expected to reach near to $1bn. As such, it’s clear that the company’s growth is very strong.

But I don’t believe that these growth prospects are fully reflected in the valuation. In fact, using this year’s results, Airtel Africa has a price-to-earnings ratio of around 12. This is an extremely modest P/E ratio for a company that’s growing at such a quick rate and is lower than the average among FTSE 250 stocks. Further, Vodafone, which also operates in the telecommunications sector, has a current P/E of 24. This is despite the fact that it’s seeing extremely limited growth. Accordingly, if Airtel Africa was to reach a similar valuation to Vodafone, it would have to double in value. Therefore, this seems a reasonable target, especially as Airtel Africa has far higher growth prospects than Vodafone.

The risks

There are several risks that could disrupt this growth however and prevent the shares from doubling in value, instead seeing their value decrease. For example, although Africa is a high-growth, underdeveloped market, which should help propel growth, there is also instability in the area. This includes the current fragile state of democracy in Nigeria, where the firm generates around 40% of sales.

There is also rising competition on the continent, a factor that could slow growth.  This includes companies such as Orange and Telecel Centrafrique.

What am I doing with this FTSE 250 stock?

Airtel Africa already makes up one of the largest positions in my portfolio, and I may buy even more. As already demonstrated, it trades on a low P/E ratio, and from a valuation perspective, to me, the shares seem capable of doubling in value.

It also has a subsidiary, Airtel Money, which has recently prompted an investment from Mastercard. This implies that it has extremely high potential, another factor that points to rising profits in the future. Banking is a still-developing market in Africa, and the sector is expected to expand rapidly. This offers further upside potential.  

Stuart Blair owns shares in Airtel Africa Plc. The Motley Fool UK has recommended Airtel Africa Plc, Mastercard, and Vodafone. 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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The FTSE 100 has historically generated a yield of around 3%-4%, but several stocks in the index offer significantly more. For many investors, income is a preferred strategy. And even though my portfolio is more geared towards growth, dividends still play a vital part in my total returns. With that in mind, let’s look at two FTSE 100 stocks that have yields higher than 9%. Should I buy them?

Turnings homes into profit

Despite the disruptions of the pandemic on supply chains, homebuilders like Persimmon (LSE:PSN) have enjoyed some significant tailwinds. The temporary lifting of stamp duty, continued government support schemes, and more recently, inflation has sent property prices through the roof.

That’s obviously not great for individuals looking to buy a home. But Persimmon has managed to capitalise on the situation so far. Looking at its latest trading update, revenue in 2021 grew by 8% to £3.61bn. This is primarily thanks to the average house selling price climbing to £237,050 from £230,534, as well as an increased number of new-build completions. As such, management raised the dividend payout, and the stock now has a yield of 9.2%!

With government support schemes for first-time buyers coming to an end in March 2023, the favourable environment for homebuilders may soon be coming to an end too. This could compromise the FTSE 100 stock’s dividend yield if it leads to falling property prices. However, as demand for new housing in the UK remains elevated, I think it’s a risk worth taking for my portfolio.

A FTSE 100 stock adapting to the electric vehicle era

The automotive industry is in the process of phasing out petrol and diesel cars in favour of electric. And at the heart of these vehicles is a lithium-ion battery. With over a billion cars worldwide to be replaced by electric alternatives, the demand for lithium as a raw material is surging.

That’s great news for the mining giant Rio Tinto (LSE:RIO), which just acquired another lithium project in Argentina for $825m. With a diversified metals portfolio consisting of other materials related to renewable energy technology being extracted, this FTSE 100 stock looks like it’s got some considerable growth ahead. That’s especially encouraging given it’s currently paying out a 9.1% dividend yield.

But the shift towards a greener future is also causing problems for the business. Mining is not exactly known for being environmentally friendly. And protests in Serbia have erupted, disrupting Rio Tinto’s lithium mining operations in the region. If the Serbian government rescinds its drilling licenses, it could cause significant short-term disruptions to the group’s future income.

But over the long term, I think Rio Tinto should be able to find new projects elsewhere should the worst come to pass. That’s why I believe it could be a fantastic income opportunity for my portfolio, even with this risk factor.

Zaven Boyrazian 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.

The THG (LSE: THG) share price slumped 9% in deals this morning after it issued a trading update for the fourth quarter of 2021. 

The headline figures in the report look impressive. Fourth-quarter revenues jumped 27% compared to Q4 2020. Acquisitions helped boost sales as well as organic growth. Overall, the group’s sales hit £2.2bn for 2021 as a whole, up nearly 38% year-on-year and 95% compared to 2019 levels. 

However, it looks as if the business is suffering from the inflationary pressures that are biting across the retail sector. The company is warning full-year profit margins will be lower than expected. It is now forecasting margins of 7.4% to 7.7% compared to the 7.9% previously expected. Management expects these strains to last until at least the second half of 2022. 

Market sentiment 

I think this downbeat outlook explains why the market is punishing the THG share price today. The company was already facing a lot of pressure heading into these results. It has been fighting off concerns about its corporate governance structure, growth outlook, and accounting standards over the past couple of months. Falling margins are just the latest headwind facing the business, although these are mostly out of its control. The entire economy is having to deal with the challenge of rising prices. Some businesses can pass these price rises on to consumers. Others are struggling. 

As the firm’s update explains, these pressures are likely to remain an issue for the group for at least the next year.

Nevertheless, I think THG is better placed than many of its peers to navigate the uncertainty. The company has been built from the ground up using technology, and can use technology to reduce costs and improve efficiency. 

The enterprise has also invested heavily in infrastructure over the past 12 months. It has spent £1bn building its order fulfilment technology, suggesting that the business has the infrastructure needed to meet rising order volumes and capitalise on the booming e-commerce market. 

THG share price pressure 

Despite its competitive advantages, the company is struggling to rebuild confidence in the City. Analysts are incredibly sceptical about THG’s prospects. The latest warning about profit margins has not helped improve sentiment. 

That being said, I think the market is overreacting following today’s release. Sales growth of 38% year-on-year is incredibly impressive. What’s more, as I have tried to highlight above, every single retailer is having to deal with rising prices, so it seems strange that THG should be overly punished for something the rest of the industry also has to grapple with. 

I think today’s decline is more of a reflection of general investor sentiment towards the business. The market seems to be looking for any reason to sell the stock. 

For long-term investors, this could be an opportunity. In theory, equity prices should track underlying business performance in the long run, suggesting that if sales continue to expand, the THG share price should follow suit. And with that being in the case, I would be happy to buy the stock for my portfolio as a speculative investment today. 

Rupert Hargreaves 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.