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Growth shares typically boast rapid revenue and earnings increases, often with high price-to-earnings (P/E) ratios reflecting the market’s expectations. They tend to be more volatile but, over time, successful growth stocks can dramatically outperform other stocks.
As an income investor, I tend to favour large-cap dividend shares to build wealth. However, I’m well aware that growth stocks have their place in a diversified portfolio. As someone who appreciates the importance of diversification, I believe it’s sensible to hold a blend of growth and income stocks to capture the best of both worlds.
Some of the best opportunities come from small-cap companies that plough profits back into expansion. Picking the right ones can deliver even greater long-term returns than dividends — albeit with more bumps along the way.
A promising UK tech stock
Beeks Financial Cloud (LSE: BKS) is a good example of an up-and-coming UK growth stock. It’s a small-cap worth just £147.5m that provides cloud computing infrastructure to the financial services sector.
Recently, it landed a lucrative contract with the Australian Securities Exchange (ASX) to support its new ‘Colocation on Demand’ service. The deal exemplifies the company’s niche appeal in providing low-latency, high-security cloud solutions to trading venues and banks.
Since its 2017 listing, Beeks shares have climbed nearly 400%, despite a 23% dip this year following an explosive 181% rally in 2024. This volatility’s par for the course with small-cap growth stocks, and highlights why patience is often required.
Growth and fundamentals
Revenue surged by 25.7% last year, while diluted earnings shot up by an astonishing 273%. The business also beat earnings forecasts by 20% in its FY2024 results. This level of momentum partly explains its lofty P/E ratio of 66, which may seem excessive, but could prove reasonable if earnings continue to compound.
Growth alone doesn’t always tell the whole story, so it’s important to dig deeper. Encouragingly, Beeks’ balance sheet looks solid, with almost no debt, £40m in equity and £5.1m in free cash flow.
Still, there are risks. As a small-cap, Beeks faces low liquidity, which can amplify share price swings. Any hiccup in contract wins or execution could be punished harshly by the market. Additionally, the broader cloud infrastructure industry is highly competitive, with pricing pressures and rapid technological shifts that could squeeze margins.
My verdict
Stepping back, this is why I favour holding growth stocks like Beeks alongside steadier dividend plays such as insurers or utilities. Growth shares offer the tantalising prospect of notable gains driven by earnings and market share capture. However, they usually pay minimal dividends, trade on higher multiples, and can tumble sharply if results disappoint or interest rates rise.
Meanwhile, income stocks tend to be more mature businesses with stable cash flows, offering consistent payouts and less dramatic share price moves. Balancing both styles allows investors to benefit from the explosive potential of growth stocks while cushioning portfolios with the reliable income of established blue-chips.
For me, Beeks Financial Cloud is a UK growth stock worth considering – so long as the risks are accounted for and the position is allocated accordingly. With a solid balance sheet and clear niche, it could be a long-term winner. But as always, diversification remains crucial to navigating the ups and downs of investing.
This story originally appeared on Motley Fool
