Should you buy Rhythmone plc as it closes in on a return to profitability?

Is Rhythmone plc (LON: RTHM) worth buying after today’s news sends its shares soaring?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares in online advertising specialist Rhythmone (LSE: RTHM) have risen by over 7% today following the release of an upbeat third quarter update. It shows that the business is continuing its march towards profitability, which it’s aiming to achieve in financial year 2017. In the last year its shares have more than doubled. Does this mean that the opportunity for a capital gain has passed, or is now the right time to buy the stock ahead of potential profitability?

An improving business

The third quarter performance of Rhythmone was in line with previous guidance. It produced sequential monthly growth in sales and EBITDA (earnings before interest, tax, depreciation and amortisation), with core products now accounting for 84% of total sales. This performance was led by strong growth in programmatic platform revenues, which achieved benchmark highs across multiple time frames.

During the period, the company moved into five new EU markets, bringing the total to 14 in the current year. It also expanded its platform infrastructure and doubled its data capacity in Amsterdam to help scale new supply and demand activity in the year. Furthermore, the acquisition of Perk provides the opportunity for synergies between the two businesses as well as growth potential. It’s on track to close by the end of the current month.

Growth outlook

As mentioned, Rhythmone is on the way to returning to profitability. Consensus forecasts suggest that this will take place in the next financial year, before it posts a rise in earnings of 70% in the following year. If it is able to achieve this level of financial performance then further share price gains seem likely. After all, Rhythmone trades on a relatively lowly valuation. It has a price-to-earnings growth (PEG) ratio of just 0.2, which indicates that there’s significant upside potential.

Its valuation is far lower than that of sector peer Sage Group (LSE: SGE). Sage is expected to post a rise in its bottom line of 15% this year, followed by growth of 9% next year. This puts it on a PEG ratio of 2.1, which indicates that it lacks value for money at the present time.

Certainly, Sage is a lower-risk buy than Rhythmone, given their current level of financial performance. Sage has delivered four consecutive years of profit growth and its strategy has been tried and tested. Furthermore, the chances of a downgrade to the company’s guidance is relatively slim since it has a consistent and robust business model. By contrast, Rhythmone remains lossmaking and at the start of a period of integration with Perk.

Therefore, while profitability is on the horizon, there’s still a long way to go – especially as it nears its seasonally slowest quarter of the year. However, given its wide margin of safety, it appears to be worth buying and could even outperform its more expensive, but better quality, sector peer.

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.

Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Sage Group. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

Here’s how I’d target £496k in FTSE 100 shares and £19k of passive income in a Stocks & Shares ISA

I invest as much surplus cash as I can at the end of the month in my Stocks and Shares…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

Is Rolls-Royce’s share price an irresistible bargain?

Is Rolls-Royce's share price the FTSE 100's greatest bargain today? Royston Wild explains why he would -- and wouldn't --…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Is the Vodafone share price a wonderful bargain or a horrible value trap?

As the Vodafone share price continues to fall, is it now a stock to buy with a view to a…

Read more »

Hand of a mature man opening a safety deposit box.
Investing Articles

I’d buy 95,239 shares of this banking stock to generate £200 of monthly passive income

Muhammad Cheema takes a look at how Lloyds shares, with a dividend yield of 5.9%, can generate a healthy monthly…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Can FY results give the Antofagasta share price a long-term boost?

The Antofagasta share price has had a good five years. Now the company says it's set to enter a new…

Read more »

Person holding magnifying glass over important document, reading the small print
Dividend Shares

Can I make sustainable passive income from share buybacks?

Jon Smith notes the rise in share buybacks from FTSE 100 companies, but flags up why they aren't great for…

Read more »

Front view of a mixed-race couple walking past a shop window and looking in.
Investing Articles

After the Currys share price rockets, here are more potential UK takeover targets!

The Currys share price has surged 39% higher in response to news of a takeover bid. Which UK stocks could…

Read more »

Investing Articles

Down 25%, where will the British American Tobacco share price go next?

The British American Tobacco share price has taken a hit. But this Fool isn't deterred. He think's now could be…

Read more »