Why I’d still buy ‘overvalued’ multi-baggers Gear4music Holdings plc and Keywords Studios plc

Paul Summers thinks there could be more to come from small-cap stars Gear4music Holdings plc (LON:G4M) and Keywords Studios plc (LON:KWS)

| 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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

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.

Online musical instrument retailer Gear4music (LSE: G4M) and technical services provider Keywords Studios (LSE: KWS) have rewarded investors handsomely over the last year with share price rises of 494% and 235% respectively before today.  

Despite this wonderful performance — and the massive valuations now attached to both stocks — I think there could be further upside ahead. 

Still in tune

While fairly light on detail, today’s AGM trading update from Gear4music saw CEO and founder Andrew Wass confirm that the business was trading in line with expectations with revenue growth in both in the UK and its international markets continuing to be “strong relative to a very strong H1 FY17“. Recently opened European distribution centres in Sweden and Germany are “materially improving” Gear4music’s presence in Northern Europe and further sales momentum is predicted in H2.

As previously announced, the company expects the current financial year to follow a “more typical seasonal trading pattern” with sales and profits weighted towards H2. First-half numbers — due in October — will also take into account costs relating to the aforementioned distribution hubs and the firm’s new premises in York. 

As updates go, today’s statement was hardly doom-laden. In keeping with investors’ tendency to wildly overreact when anything less than perfect is announced by a market darling however, shares fell over 12% in early trading.

Today’s sell-off is surely overdone. The company’s plan to become one of the largest musical instrument retailers in Europe still feels both realistic and achievable given the quality of its online offering, hugely positive customer feedback and growing presence in a highly fragmented industry. The oversubscribed £4.2m fundraise back in May was also a huge indication of how confident institutional investors are in the company’s long term prospects. 

It’s never pleasant to see a holding plummet so far in one day but my belief in Gear4music remains as solid as ever. Indeed, although a forecast 31% rise in earnings per share in 2018/19 will still leave the company trading at a heady 60 times earnings, I regard today’s fall as an excellent opportunity for growth focused investors to build a position.

Game on

Although a degree of profit-taking appears to have already commenced following yesterday’s superlative 19% rise, I simply can’t see shares in Keywords going anywhere but up over the medium-to-long-term, such is the potential for companies operating in the hugely lucrative gaming industry.

Yesterday’s ahead of expectations half-year update made for very pleasant reading. In the six months to the end of June, revenues grew by 50% to €63.7m and adjusted pre-tax profits by 60% to €9.6m. With one exception due to tough prior year comparables, all of the company’s service lines registered organic growth on a like-for-like basis.

Much of my bullishness on Keywords is due to its acquisition-friendly nature. The Dublin-based business has made four purchases since the beginning of 2017 alone, including one that allows it to enter the market for video games-related software engineering services. Given the €35m credit facility agreed with Barclays back in April, I suspect this spree will continue over the remainder of the financial year, such is the firm’s goal of becoming the go-to company in its niche.

The valuation of 45 times forecast earnings may look seriously high but given the potential growth that lies ahead, it may still be a price worth paying.

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.

Paul Summers owns shares in Gear4music and Keywords Studios. The Motley Fool UK has recommended Keywords Studios. 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.

More on Investing Articles

Investing Articles

The Diploma share price looks like it’s hit a ceiling. What can we expect in 2025 and beyond?

After the weak results last month, analysts are no longer optimistic about Diploma's share price. Our writer considers its future.

Read more »

Investing Articles

I’m backing these 2 UK shares to soar again next year

Harvey Jones is excited by the market-beating performance of these two UK shares in 2024. Now he hopes they can…

Read more »

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

Down 92.5%, is NIO stock the multi-bagger we’ve all been dreaming of?

Could NIO stock surge 100% over the next 12 months and become another multibagger? Dr James Fox takes a close…

Read more »

Investing Articles

An 8.6% yield, but down 19%! Is it time for me to start earning passive income by buying shares in this FTSE 250 REIT?

Is a reliable 8.6% yield enough to make this FTSE 250 real estate investment trust one of the best dividend…

Read more »

Pink 3D image of the numbers '2025' growing in size
Investing Articles

Is the Diageo share price set for a blockbuster comeback in 2025?

Harvey Jones was happy to see the Diageo share price rise yesterday. It feels like the first time in ages.…

Read more »

Burst your bubble thumbtack and balloon background
Investing Articles

Should I buy Helium One, possibly the FTSE’s ‘most popular’ share?

After doing some number crunching, our writer’s identified what he believes to be one of the FTSE’s most favoured stocks.…

Read more »

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Growth Shares

Here are the FTSE 100’s best performers over the last 5 years

Since 2019, some FTSE 100 shares have risen spectacularly. Here’s a look at the best performers in the index over…

Read more »

Investing Articles

I could have bought BAE Systems shares for my SIPP but I invested in this defence ETF instead

Edward Sheldon just put some capital to work within his SIPP, buying an ETF that provides broad exposure to the…

Read more »