Online greetings card firm Moonpig (LSE:MOON) has enjoyed a great start to its time as a listed company. Since arriving on the market earlier this month at 350p, the shares have soared 34%.
As someone who already uses its services, I should be bullish on this new-stock-on-the-block, right? Not exactly.
Why are Moonpig shares flying?
Don’t get me wrong. On a fundamental level, Moonpig appears very attractive. Not having a high street estate to maintain (and only 400 or so employees to pay) allows the company to generate huge margins. Returns on capital employed — a metric favoured by UK star fund manager Terry Smith — are also seriously good. The fact that the company operates in both the UK and the Netherlands gives earnings some geographical diversification too.
On top of this, business is booming. Last week, Moonpig reported that the huge demand it experienced over its first half had continued into Q3. In fact, the £1.6bn cap had its “strongest ever trading week” ahead of Valentine’s Day. Assuming it can continue to attract shoppers to its site, management expects full-year revenue will be “approximately double” the £173m achieved in FY20.
I don’t think we should be surprised. The ability to buy a card online and have it posted directly to the recipient is clearly very useful at a time when shops on the high street can’t open. Nevertheless, there are a few reasons why I’m not sure recent momentum in Moonpig’s shares will continue in the near term.
What could go wrong?
Chief among these is the lifting of coronavirus restrictions. Although dashing to purchase a card might not be a priority for everyone, any reason to stop looking at our screens and leave the house may prove detrimental to Moonpig. Interestingly, the company has already hinted that the number of purchases and value of orders made by its shoppers will likely “moderate” later this year. Will traders consider banking profits in advance of this happening? I think it’s possible.
A more general concern for me is that the barriers to entry in Moonpig’s industry appear low and that its outsize profits could attract even more competition in time. Is there anything about Moonpig’s business plan that will set it apart from rivals when this happens? Aside from an established brand, I’m not sure there is.
Another concern I have is whether Moonpig will succeed in getting customers to add more things to their online baskets than just cards after lockdown has ended. This is something I’ve never been tempted to do. If I send flowers, I contact a florist. Champagne or chocolates? There’s more selection at a supermarket. That said, others may feel differently and a one-stop-shop approach could appeal to many. I feel it’s too early to know, however.
Sky-high valuation
Finally, there’s the valuation. A forecast price-to-earnings (P/E) ratio of 34 feels pretty rich for any greetings card seller, regardless of its online-only status and how it scores on quality metrics. Online shopping habits are here to stay, of course. But will demand for sending physical cards via an online seller rocket in the future? We just don’t know.
Moonpig shares present as an interesting investment but it’s not one I’m desperate for. I see better UK growth opportunities elsewhere in the market.
