3 Stocks That Will Surge Higher on Margin Expansion and Cash Flow Upside
There can be various stories that support a bullish thesis for a stock. However, it ultimately boils down to the cash flow–generation capability of a business. There have been attractive stocks to buy in the past that have destroyed their wealth due to weak margins and continued cash burn.
Therefore, a key screener in the growth stock space is to look at the EBITDA margin trend. Once operating leverage kicks-in, stocks tend to skyrocket. On the other hand, there are stories like Lucid Group (NASDAQ:LCID) with the stock trending lower on continued cash burn visibility.
The focus of this column is on three stocks that represent companies that are poised for EBITDA margin expansion this year and in 2025. It goes without saying that as margin expands, it’s likely to translate into higher cash flows. This will impact valuations positively and therefore the stock price.
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Let’s discuss these stories and the reason for potential expansion in key margins.
Riot Platforms (RIOT)
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Riot Platforms (NASDAQ:RIOT) stock has been in a consolidation mode after skyrocketing in the first half of 2023. In the last six months, RIOT stock has trended higher by just 15% even as Bitcoin (BTC-USD) remains in a strong uptrend. I believe that RIOT is among the best stocks to buy from the Bitcoin mining sector. As the digital asset trends higher, the company is positioned for massive EBITDA margin expansion and cash flow upside.
Besides the margin expansion story, Riot has chalked out aggressive growth plans. At the end of 2023, Riot has projected capacity of 12.4EH/s. This is expected to increase to 28.8EH/s by the end of this year and further to 38.1EH/s by the end of 2025.
It’s worth noting that Riot has a zero-debt balance sheet. Further, the company reported cash and digital assets of $599 million as of Q3 2023. With high financial flexibility, financing aggressive expansion is unlikely to be a concern. As the company reports strong numbers in the coming quarters, RIOT stock is likely to fly higher.
Miniso Group (MNSO)
Source: shutterstock.com/Hendrick Wu
Miniso Group (NYSE:MNSO) stock touched highs of $30 in September 2023. There has been a meaningful correction from those levels and MNSO stock trades at $19.80. I believe that this is a good opportunity to accumulate this 2% dividend yield stock. A forward price-to-earnings (P/E) ratio of 18.6 looks attractive for a growth stock.
Coming to the margin expansion, Miniso reported revenue and EBITDA of $1.6 billion and $389 million respectively for financial year 2023. The company’s EBITDA margin expanded by 1,060 basis points during this period to 24.6%. Further, for Q1 2024, Miniso reported EBITDA margin of 26.8%. Therefore, margin expansion has sustained. With increasing cash flows, Miniso also initiated its first dividend.
An important point to note is that Miniso is a lifestyle retailer with a dynamic product portfolio. With aggressive inroads in international markets, I expect margin expansion to sustain. Further, a favourable product mix and supply chain integration is likely to support margin expansion.
DraftKings (DKNG)
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DraftKings (NASDAQ:DKNG) stock had a strong last year with an upside of more than 200%. The stock has however corrected from highs and I believe that gradual accumulation can be considered.
DraftKings is an online sports betting and iGaming company. With more states in the U.S. legalizing OSB and iGaming, the company’s addressable market is significant. DraftKings estimates that in current operating states, the addressable market will be $30 billion by 2030.
However, DKNG stock was depressed through 2022 even with stellar revenue growth. The comeback last year has been on the back of EBITDA margin improvement on the back of cost cutting and operating leverage.
DraftKings has now guided for adjusted EBITDA of $400 million (mid-range) for this year. Positive EBITDA outlook has spurred the stock higher and I believe that the margin expansion story will continue for the next 12 to 24 months. Post this, I would be looking at a steady-state EBITDA. Of course, revenue guidance remains robust and as financial metrics improve, DKNG will trend higher.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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