There are some small cap ASX shares that investors may think are exciting and worth a closer look.

Businesses that are earlier on in their growth journey may have a longer growth runway than companies that are already very large.

Here are three businesses that are quite small but are growing:

Sezzle Inc (ASX: SZL)

According to the ASX, Sezzle has a market capitalisation of $1.26 billion.

Sezzle is a buy now, pay later business that’s headquartered and focused in the US.

In its latest update, which was for the month of November 2020, Sezzle said that its active consumers had grown by 151.5% year on year to 2.07 million and active merchants went up by 164.5% to 24,846.

November was an important month for retail-related businesses because it included the four big retail days of Black Friday to Cyber Monday (BFCM) weekend.

The month saw underlying merchant sales (UMS) grow 188.5% to AU$153.9 million with annualised UMS also growing by 188.5% to AU$1.85 billion.

At the time of that update, Sezzle CEO and executive Chair Charlie Youakin said: “In addition to our record setting performance in November and over the BFCM weekend, we are extremely excited about the direction of our business, as we recently partnered with GameStop and eCommerce platform Wix.

“Sezzle is now offered at Gamestop’s network of more than 3,300 US retail stores, its online store, and in the GameStop mobile app. Our integration on Wix is available to all Wix merchants in the United States, Canada, India and in the future will be available in other regions as Sezzle expands internationally.”

City Chic Collective Ltd (ASX: CCX)

According to the ASX, City Chic has a market capitalisation of $911 million.

City Chic is a global omni-channel retailer that specialises in plus-size women’s apparel, footwear and accessories. It has a number of brands including City Chic, Avenue, CCX, Hips & Curves and Fox & Royal. It has a network of 96 stores across Australia and New Zealand, websites operating in Australia, New Zealand and the US, marketplace and wholesale partnerships with major US retailers such as Macys and Nordstrom, and a wholesale business with European and UK partners such as ASOS and Zalando.

FY20 was a disrupted year for the small cap ASX share with plenty of stores being closed during the COVID-19 lockdown period. Even so, it grew total revenue by 31% and online sales went up 113.5%. Online sales made up 65% of total sales in FY20.

The northern hemisphere made up 42% of global sales and this is about to rise after the announced acquisition of Evans in the UK from Arcadia after going into administration. The plus-sized clothing business made £26 million (A$46 million) of revenue from its e-commerce and wholesale business in the 12 months to August 2020. City Chic won’t be buying the physical store network.

At the current City Chic share price, it’s priced at 24x FY23’s estimated earnings.

Volpara Health Technologies Ltd (ASX: VHT)

According to the ASX, Volpara has a market capitalisation of $346 million.

Volpara is a digital health company focused on early detection of breast cancer by improving the quality of screening using artificial intelligence (AI).

The small cap ASX share said that its gross profit margin is now 92%. In the FY21 half-year result it showed that its annual recurring revenue went up by around 27% to NZ$19.9 million with subscription revenue growing 71% to NZ$8.8 million.

The number of women in the US that had one of Volpara’s products applied on their images and data grew from 25.8% in the first half of FY20 to approximately 27% in the first half of FY21.

Volpara has several goals including: maintaining a high retention rate, increasing average revenue per user, win new customers, upsell with existing customers and it may make acquisitions.

More reading

• Top brokers name 3 ASX shares to buy next week
• 3 top small cap ASX shares to buy
• Top brokers name 3 ASX shares to buy today
• 2 small cap ASX healthcare shares to watch
• ASX 200 drops over 1%

Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends VOLPARA FPO NZ. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. recommends Sezzle Inc. The Motley Fool Australia has recommended Sezzle Inc and VOLPARA FPO NZ. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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It has been a topsy-turvy few years for long-term shareholders of digital lottery business Jumbo Interactive Ltd (ASX: JIN). After surging from below $10 to almost $30 by October 2019, the Jumbo share price dropped off a cliff. The fall was precipitated by panic-selling as the spread of COVID-19 wreaked havoc across global share markets, and by March Jumbo shares had dropped back below $10 again.

Since March, the Jumbo Interactive share price has recovered slightly and is trading at $13.87 as at the time of writing. However, this is well short of the lofty highs of around $27 the company’s shares had hit back in October 2019.

But major broker Goldman Sachs Group still feels bullish about the prospects for Jumbo Interactive shares. The broker believes that most of the worst market conditions are behind Jumbo, and that it actually has some unique business opportunities over the next 12 to 24 months.

What Goldman likes about the Jumbo share price

One of the key items highlighted by Goldman was the recent deal struck between Jumbo and Western Australian Government-owned Lotterywest. Under the deal, which was announced back in November, Jumbo will provide its online software platform to Lotterywest, and will receive a 9.5% service fee for each transaction processed. The deal is for up to 10 years but can be reviewed in years 3 and 6 by Lotterywest.

According to Goldman, the successful integration of Lotterywest could provide Jumbo with significant tailwinds, and even lead to further domestic and offshore contract wins. Without providing specifics, Jumbo has flagged the potential for software-as-a-service (Saas) business opportunities across the United States eastern seaboard. The company was also recently granted a licence to supply its software platform to lottery operators in Great Britain.

While long-term shareholders will be pleased that Jumbo now has Goldman’s recommendation, they may be a little disappointed with the 12-month price target of just $14.50 the broker has put on Jumbo shares. This means that it could be a long time before the Jumbo share price is back within touching distance of $30.

Goldman does identify a number of key risks associated with an investment in Jumbo. Changes in gambling regulations are always a threat to the industry and could potentially disrupt Jumbo’s business model or even lead to increased competition by making it easier for new entrants in the lottery sector.

The other, potentially more obvious, risk is the possibility of Jumbo’s SaaS business falling short of expectations. A fair amount of the bullish outlook on the Jumbo share price is focused on the company’s SaaS runway, both at home and abroad. If the company can capitalise on the momentum generated by its Lotterywest contract, this will go a long way towards unlocking the value Goldman sees in Jumbo shares.

More reading

• Is Jumbo Interactive (ASX:JIN) a hidden COVID-19 winner?
• 2 ASX tech shares to buy for 2021
• Why Abacus, Emerge Gaming, Jumbo, & Woodside shares are dropping lower

Rhys Brock owns shares of Jumbo Interactive Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. recommends Jumbo Interactive Limited. The Motley Fool Australia owns shares of and has recommended Jumbo Interactive Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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With interest rates unlikely to be going higher any time soon, the Australian share market looks set to be the best place to earn a passive income for the foreseeable future.

The good news is that there are plenty of options for income investors to choose from. Two that could be worth considering are named below:

Australia and New Zealand Banking GrpLtd (ASX: ANZ)

With the worst of the pandemic now behind us, things are looking a lot more positive for the big four banks. Especially with the housing market tipped to rebound and the relaxing of responsible lending rules.

Another positive for investors is recent news that APRA will be removing its dividend restrictions on the banks from 2021. This follows some significant stress testing by the regulator, which found that the banking sector was strong enough to withstand even the most catastrophic economic crisis.

Morgans is positive on the bank and recently reiterated its add rating and lifted its price target on the company’s shares to $26.00. The broker is also forecasting a $1.27 per share dividend in FY 2021 and a $1.50 per share dividend in FY 2022. Based on the current ANZ share price, this represents 5.5% and 6.5% dividend yields, respectively.

Wesfarmers Ltd (ASX: WES)

Another dividend share to look at is Wesfarmers. It is a leading conglomerate that owns a wide range of popular businesses including Kmart, Target, Catch, Officeworks, and Bunnings.

The latter is the company’s biggest contributor to its overall earnings. This has been a huge positive in 2020, as the hardware retailer has been a very strong performer. Thankfully, Bunnings has continued this positive trend in FY 2021 and delivered sales growth of 25.2% for the first four months of the financial year.

Combined with strong performances across other key brands, this appears to have positioned Wesfarmers to deliver a very positive full year result next year.

According to a note out of Morgan Stanley, its analysts have pencilled in a 160 cents per share fully franked dividend in FY 2021. Based on the current Wesfarmers share price, this represents an attractive forward 3.1% dividend yield.

More reading

• Leading fund manager names the ASX dividend shares to buy in 2021
• 2 blue chip ASX shares to buy next week
• Forget savings accounts and look at these quality ASX dividend shares
• ASX 200 up 0.5%: Big four banks rise, Smartgroup guidance, Transurban distribution update
• In a record-breaking year, here are some of the world’s most popular shares

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Wesfarmers Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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On Thursday the S&P/ASX 200 Index (ASX: XJO) finished the week on a positive note. The benchmark index rose 0.3% to 6,664.8 points.

Will the market be able to build on this on Tuesday? Here are five things to watch:

ASX futures pointing higher.

The Australian share market looks set to start the week higher following a very positive night on Wall Street. According to the latest SPI futures, the ASX 200 is poised to open the week 32 points or 0.5% higher this morning. In late trade on Wall Street, the Dow Jones is up 0.8%, the S&P 500 has risen 1%, and the Nasdaq is up 0.9%.

Trump signs off on US stimulus package.

European and US stocks charged higher overnight after President Trump signed a US$900 billion COVID-19 relief bill into law. This narrowly averted a government shutdown and extends unemployment benefits to millions of Americans. In typical Trump fashion, the signing came days after the outgoing President suggested he would block the legislation.

Gold price softens.

Gold miners such as Newcrest Mining Limited (ASX: NCM) and Northern Star Resources Ltd (ASX: NST) will be on watch today after the spot gold price softened. According to CNBC, the spot gold price fell 0.1% to US$1,881.40 an ounce. This appears to have been driven by an improvement in risk sentiment.

Oil prices drop lower.

Energy producers including Santos Ltd (ASX: STO) and Woodside Petroleum Limited (ASX: WPL) could start the week in the red after oil prices dropped lower. According to Bloomberg, the WTI crude oil price is down 1.1% to US$47.72 a barrel and the Brent crude oil price has fallen 0.65% to US$50.96 a barrel. Demand fears are weighing on the energy prices.

Iron ore price slides lower.

The Fortescue Metals Group Limited (ASX: FMG) share price could come under pressure after iron ore prices slid lower overnight. According to Metal Bulletin, seaborne iron ore prices fell on Monday due to a downtrend in steel prices over the weekend and cold weather concerns in China.

More reading

• 2 buy-rated ASX dividend shares for income investors to snap up
• 2 ASX 200 shares to buy in January
• Leading fund manager names the ASX dividend shares to buy in 2021
• 3 reliable ASX 200 shares that keep growing
• These were the best performers on the ASX 200 last week

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The pandemic has hit the economy hard this year and stifled the growth of a good number of companies.

However, not all companies are being held back by the crisis. In fact, some have continued their unstoppable growth this year and seen their share prices storm higher.

Here’s why these two ASX shares have smashed the market in 2020:

Afterpay Ltd (ASX: APT)

The Afterpay share price is up an incredible 278% since the start of the year.

Investors have been buying the company’s shares this year after the pandemic failed to derail its incredible growth.

Thanks to the ongoing popularity of the buy now pay later payment method, the shift to online shopping, its successful international expansion, and the growing frequency of use, Afterpay delivered further explosive growth in its underlying sales and customer numbers.

Pleasingly, this strong form has continued in FY 2021. It recorded underlying sales growth of 115% to $4.1 billion in the first quarter.

Also giving its shares a boost was Afterpay recently announcing its intention to launch savings accounts and other cash flow tools in partnership with Westpac Banking Corp (ASX: WBC). This could open up new revenue streams in the future and support customer retention.

Kogan.com Ltd (ASX: KGN)

The Kogan share price has zoomed a massive 151% higher since the beginning of the year.

As with Afterpay, this ecommerce company has been a big winner during the pandemic. With most retail stores across the country closing to stop the spread of COVID-19, shoppers moved online in large numbers.

This led to Kogan delivering a very strong FY 2020 result in August and further impressive growth in the current financial year.

For example, during the month of August, the company reported gross sales growth of more than 117% and adjusted EBITDA growth of more than 466%. This was driven by the addition of 152,000 new customers to its platform during the month, bringing its total to 2,461,000. 

And while the company hasn’t released an update since then, based on what its peers have reported, it appears as though this positive trend has continued and a stellar half year result awaits investors in February.

More reading

• 3 ASX growth shares to buy this week
• 3 ASX shares to buy for 2021 and beyond
• 2 great ASX growth shares that are rapidly expanding
• 2 ASX growth shares to buy when the market reopens
• 10 incredible quotes that sum up investing in 2020

James Mickleboro owns shares of Westpac Banking. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Kogan.com ltd. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended Kogan.com ltd. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The track record of equity markets shows that a stock market recovery has always taken place after even the very worst bear markets. Therefore, buying dirt-cheap shares today and holding them for the long run could lead to high returns in the coming years.

Furthermore, with a lack of opportunities among other mainstream asset classes, today’s cheap stocks could become increasingly attractive to a wider range of investors. This may help to push their prices even higher.

A likely stock market recovery

While there has been a stock market recovery of sorts since the 2020 stock market crash, many shares trade at cheap prices. In fact, a number of sectors continue to be unpopular among investors due to their uncertain near-term outlooks. As such, there is likely to be a wide range of dirt-cheap shares available to buy today.

Over time, history suggests that there will be a further stock market rally. After all, indices such as the FTSE 100 Index (FTSE: UKX) have always produced new record highs following their previous declines. For example, previous crises such as the dot com bubble and the global financial crisis caused significant falls in stock prices. However, within a handful of years, major indices had not only recovered, but had risen to new record highs that benefitted investors who purchased undervalued stocks.

With investor sentiment continuing to be somewhat cautious due to economic and political uncertainty, there is likely to be scope for upward reratings in the valuations of today’s cheap stocks. While this process may take time, and a stock market recovery could be somewhat volatile because of a variety of risks that are likely to remain in play in the first part of 2021, taking a long-term view of today’s cheap shares could be a profitable move.

The relative appeal of today’s dirt-cheap shares

The prospect of a long-term stock market recovery could make today’s dirt-cheap shares seem even more appealing relative to other assets. Of course, that task may not be especially challenging right now.

Low interest rates mean that the returns available on cash and bonds are extremely unfavourable. They may even lag inflation over the coming years. Similarly, gold’s high price and house price growth in the past decade mean that the stock market may offer significantly greater investment appeal.

This may shift investors from other mainstream assets towards equities. With interest rates in major economies across the world expected to remain at low levels, investor demand for equities could rise.

This may help to sustain a stock market recovery, and could benefit today’s cheapest shares the most because they have the greatest scope for capital gains. As such, investing in a diverse range of them today and holding them over the long run could be a shrewd move.

More reading

• 2 ASX healthcare shares to buy next week
• 2 fantastic ETFs for ASX investors to buy
• 2 ASX tech shares to buy and hold until 2030
• Is McDonald’s stock a buy?
• 3 of the best ASX shares to buy in January

Motley Fool contributor Peter Stephens has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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One area of the share market that has been performing consistently well in recent years is the healthcare sector. Since this time in 2015, the S&P/ASX 200 Health Care index has generated a return of 122% for investors.

This has been underpinned by increasing demand, better technologies and treatments, and ageing populations.

Pleasingly, these tailwinds aren’t going away any time soon. In light of this, it is no surprise to learn that the sector has been tipped as a great place to invest over the 2020s.

But which healthcare shares should you buy? Here are two highly rated options:

CSL Limited (ASX: CSL)

CSL is one of the world’s leading biotherapeutics companies. It has been an exceptionally positive performer over the last decade thanks to a combination of acquisitions, its research and development (R&D) activities, growing plasma collection network, and its leading therapies. Its portfolio of therapies currently includes the likes of Privigen, Hizentra, Idelvion, and Afstyla. Though, this will be boosted further in the coming years thanks to its almost billion-dollar annual investment in R&D.

UBS appears confident that this strong form can continue. The broker recently retained its buy rating and $346.00 price target on the company’s shares. While it notes that plasma collection conditions are tough in some markets because of COVID-19, it remains positive on its outlook. Especially given how it has a range of options to mitigate this headwind and a burgeoning R&D pipeline. 

Pro Medicus Limited (ASX: PME)

Pro Medicus is healthcare technology company that provides radiology information systems (RIS), picture archiving and communication systems (PACS), and advanced visualisation solutions to healthcare organisations across the globe.

Due to the quality of its software, its sizeable market opportunity, and the shift away from legacy systems, Pro Medicus has been tipped to have a big future.

One broker that is positive on the company is Morgans. This month the broker retained its add rating and lifted its price target on the company’s shares to $35.02. It made the move after the company announced the signing of a five-year contract with MedStar Health worth a total of A$18 million.

More reading

• 3 unstoppable ASX shares to buy
• 5 fantastic ASX shares to buy in 2021
• 2 of the best ASX healthcare shares to buy in 2021
• 3 top ASX shares to buy in 2021
• 7 top ASX biomedical shares in 2020

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. recommends Pro Medicus Ltd. The Motley Fool Australia owns shares of and has recommended Pro Medicus Ltd. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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As my colleague revealed here recently, exchange traded funds (ETFs) continue to grow in popularity with Australian investors and keep breaking records.

According to BetaShares, the local ETF industry reached an all-time high market capitalisation of $78.7 billion in November. This is up from $73.8 billion a month earlier.

Unsurprisingly, this growing popularity has led to an increasing number of ETFs for investors to choose from.

But which ones should you buy? Among the many options, here are two ETFs that come highly rated:

BetaShares Asia Technology Tigers ETF (ASX: ASIA)

The BetaShares Asia Technology Tigers ETF allows investors to buy a slice of the biggest and brightest technology and ecommerce companies in Asia. BetaShares notes that through a single trade, this ETF provides diversified exposure to a high-growth sector that is under-represented in the Australian share market.

At present, there are a total of 50 companies included within the ETF. Among these you will find giants such as Alibaba, Baidu, JD.com, and Tencent Holdings. The latter is the company behind the hugely popular WeChat app, which has over 1.2 billion users. It is also a substantial shareholder of buy now pay later company Afterpay Ltd (ASX: APT).

BetaShares NASDAQ 100 ETF (ASX: NDQ)

Another very popular ETF from BetaShares is the BetaShares NASDAQ 100 ETF. This ETF aims to track the performance of the NASDAQ 100, which comprises 100 of the largest non-financial companies listed on Wall Street’s famous exchange.

Among these 100 companies you will find household names such as Amazon, Apple, Microsoft, Netflix, and Google parent, Alphabet. In addition to this, the fund gives investors exposure to non-tech shares including Pepsico, Starbucks, and Tesla.

BetaShares notes that the ETF has a strong focus on technology, which once again gives diversified exposure to a high-growth potential sector that is under-represented in the Australian share market.

More reading

• 2 outstanding ETFs for ASX investors to buy
• 3 ETFs for ASX investors to buy in 2021
• 2 tech ETFs to buy for growth
• How to invest in US shares in 2021
• Got cash to invest? Here are 3 ASX growth shares to buy

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of BETANASDAQ ETF UNITS. The Motley Fool Australia owns shares of and has recommended BetaShares Asia Technology Tigers ETF. The Motley Fool Australia has recommended BETANASDAQ ETF UNITS. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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One thing the Australian share market is not short of is tech shares growing at a strong rate.

Two tech shares which have been tipped to grow strongly in 2021 and beyond are listed below. Here’s what you need to know about them:

NEXTDC Ltd (ASX: NXT)

NEXTDC is a leading data centre-as-a-service provider with a growing network of centres in key locations across Australia. The company has been an exceptionally strong performer this year thanks to the pandemic accelerating the shift to the cloud.

This has led to a significant increase in demand for capacity in its data centre and underpinned strong sales and operating profit growth. It also meant that management had to bring forward its capacity expansion plans. But NEXTDC certainly isn’t resting on its laurels and is now looking overseas to boost its growth. It recently opened up offices in Tokyo and Singapore with a view of expanding into these markets in the future.

One broker that is positive on its future is Morgan Stanley. Late last month its analysts put an overweight rating and $14.60 price target on its shares.

Xero Limited (ASX: XRO)

Xero is a leading cloud-based business and accounting software provider. Thanks to its evolution into a full service small business solution over the last few years, the company has been growing its customer numbers and recurring revenues at a rapid rate.

For example, in the first half of FY 2021, Xero reported a 21% increase in operating revenue to NZ$409.8 million and a 15% lift in annualised monthly recurring revenue (AMRR) to NZ$877.6 million. It generated this from its 2.45 million subscribers.

The good news is that due to the quality of its offering, the shift to the cloud, its global market opportunity, and burgeoning app ecosystem, Xero has been tipped for more of the same in the future. Goldman Sachs believes Xero can achieve a 2030 subscriber footprint of 7.4 million and generate NZ$3.4 billion in annual revenue.

It is because of this that the broker has a buy rating and $157.00 price target on its shares.

More reading

• 3 unstoppable ASX shares to buy
• 2 rapidly growing ASX tech shares to buy
• 3 reliable ASX 200 shares that keep growing
• 5 fantastic ASX shares to buy in 2021
• 3 of the best ASX shares to buy right now

James Mickleboro owns shares of NEXTDC Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Xero. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

It’s arguably the world’s most recognizable chain of restaurants, with over 39,000 locations found in more than 100 countries. Its golden arches remind consumers they can enjoy a familiar, comforting meal almost anytime and anywhere they want.

The chain in question is, of course, McDonald’s (NYSE: MCD). It’s evolved over the years, but its appeal — and success — has effectively leveraged the idea of sameness. That is to say, customers like the fact that eating at a McDonald’s is at least a partial nod to the past; the value isn’t too shabby, either. This foundation is a big reason investors can look forward to more growth from the restaurant chain in the future.

Still, there’s one development that would-be shareholders would be wise to put on their radar.

Plenty of growth

Not every business idea McDonald’s comes up with is a winner. For example, the live-action Hamburglar meant to modernize the hamburger-stealing cartoon character and introduced in 2015 ended up being more creepy than cool. And, although the company would probably like to, let’s not forget McDonald’s once dabbled in pizza (back in the late 1980s).

By and large, though, the restaurant chain boasts more hits than misses, especially when it needs them the most. One only has to look four months back to find an example of the chain’s frequent strokes of brilliance.

While life in parts of the country is somewhat getting back to (the new) normal, as of early September, the fallout from the COVID-19 pandemic was still in full swing. Debates over the risk of restarting school were heated, while restaurants and retailers were still very restricted as to what they could and couldn’t do. Millions were still unemployed all over the world, and discretionary spending was crimped … even if just for logistical reasons. The fast-food giant’s second-quarter numbers proved it. Sales for the three-month stretch ending in June were down 29% year over year. Income fell 67%. Simply put, the company needed help.

Travis Scott came to the rescue.

You may not know who the relatively new musician and entertainer is, but younger fans of pop and rap music do. His star power was enlisted to help McDonald’s sell a $6 meal combo in September. The promotion was so successful that the company struggled to fully meet demand. McDonald’s eventually reported that September’s sales marked the best single month in almost a decade.

One good month or one savvy promotion doesn’t inherently make a company a winner. The fact that McDonald’s was able to act as well as it did when it did is a microcosm of its entire operation, though. Not every idea is a winner, but the ones that are end up being very big deals.

This reality is evident in the numbers. Earnings aren’t growing in a perfectly straight line, but they are growing pretty consistently, and are expected to keep growing from here.

As for revenue, yes, it’s been shrinking, but that’s by design. The organization has been paring back its ownership of restaurants by selling them to franchisees. As of September, 36,438 of the world’s 39,096 locations (6.8%) were franchise properties, up from 29,851 of the 36,405 McDonald’s locales (18%) five years ago. The move ultimately means lower sales but potentially more profits since franchisees’ fees and royalties are higher-margin revenue. This transition is largely complete now, translating into sales and earnings growth going forward.

Just keep tabs on franchisees’ frustration levels

That said, the company’s strategic shift away from restaurant ownership and toward a more profitable franchising focus has coincided with what some would characterize as an increasingly unfair burden on local operators.

Franchising is usually a symbiotic relationship within the fast-food industry. A well-known outfit like McDonald’s or rivals such as Wendy’s or Subway bring brand recognition and national advertising to the table, while localized businesspeople offer labor and remote management. These entrepreneurs also supply franchisors with recurring royalty revenue.

Being a McDonald’s franchisee is neither cheap nor easy, though. Not every operator wants to serve every menu item the corporation pushes its restaurants to offer. Ever-increasing promotional costs and required remodels have also become more and more common, as have frustrations regarding rent payments; the parent company owns its restaurant real estate and then leases it to franchisees at rates based on that store’s sales. And, despite coronavirus-related headwinds, early this month the parent unveiled new, additional franchise fees to be imposed beginning in 2021 at the same time as some operator subsidies were altogether canceled.

In response to new fees announced this month, some franchisees are rethinking their willingness to continue offering value-oriented parts of their menu. Others are mulling increased prices for Happy Meals, while still others are reportedly considering slightly higher prices across the entire menu.

And rather than cooling off over time, this infighting still appears to be ramping up.

Bottom line for McDonald’s

It’s not a fatal flaw, and certainly not one that could prove immediately disastrous. Even on its worst days, McDonald’s is a more reliable cash collection mechanism than many other fast-food chains. As was already noted, it’s the most recognizable name in the business for a reason. It’s also been a great investment for the same reason.

Nevertheless, the tensions between the parent company and franchisees not only seem to never end but may even be worsening. This sort of adversarial dynamic poses the risk of pushing franchisees out of the McDonald’s network while preventing other prospective franchisees from ever teaming up with the company.

It’s still not a reason to avoid the stock, though … at least not yet.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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James Brumley has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

The post Is McDonald’s stock a buy? appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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