For investors piling into the FTSE 250 stock at the bottom of last spring’s crash, the ride has been meteoric. As I write, the shares change hands near 350p. And the market capitalisation is around £1.23bn. But in March 2020, the share price languished close to 70p.
Why I think 888 is a FTSE 250 stock to buy
But 888 has more than recovered from the coronavirus dip. The stock is now above the previous high of around 320p set in May 2018. And surging earnings throughout 2020 helped to drive that progress. Many people, it seems, turned to gaming and gambling as an antidote for Covid stress, furlough boredom, and bulging personal bank accounts.
Today the company reported revenue in 2020 almost 52% higher than the previous year. And adjusted earnings per share shot up by nearly 103%. Meanwhile, cash inflow backed up those earnings and pushed the firm’s bank balance up to $190m from just under $97m the prior year. One of the strengths of the business is its strong balance sheet showing only around $7m of interest-bearing loans and lease liabilities.
The firm’s financial performance has been good. And the directors rewarded shareholders with a 200% hike in the total dividend for the year. But that increase includes one-off special payments, as well as ordinary dividends.
But it’s not all perfect. 888 is unlikely to repeat its barnstorming 2020 performance in the current trading year as the world emerges from lockdowns. City analysts expect earnings to decline by around 20% in 2021 and the total dividend could be more than 50% lower.
Looking ahead, the company said the “annualised impact” of regulatory and compliance changes will likely knock between $70m and $100m off this year’s revenue. To put that in perspective, the company just posted revenue of just under $850m for 2020.
Yet the directors insist there’s been “strong” momentum in 2021 so far. And they are “confident” the company will achieve growth in revenue during the year. One reason for optimism is the expansion programme in the US. In 2020, around 11% of revenue came from the US and the Americas.
However, the UK is still the company’s biggest single market, accounting for 39% of revenue last year. But 48% came from the rest of Europe, the Middle East and Africa, with the remaining 2% coming from the rest of the world. Chief executive Itai Pazner reckons 888 has an “outstanding platform” upon which to build further strategic progress during 2021 and beyond.
With the stock at 350p, the forward-looking earnings multiple for 2021 is around 22 and the anticipated dividend yield is close to 1.7%. I reckon that valuation looks rich because the company is unlikely to repeat its recent rate of earnings growth. Nevertheless, there’s a longer-term growth story to play for here. Although growth in earnings is not guaranteed in the years ahead. But on balance, I’m keeping the shares on watch with a view to buying on dips and down-days to hold them for the long haul.
Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.
Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.
The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.
But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.
Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.