Moonpig (LSE:MOON) is a recently-listed AIM stock that operates an online marketplace for personalised greetings cards. It’s well known and over the past two decades has amassed a market share three times bigger than its nearest competitor. Is it a viable long-term investment though?
Moonpig’s recent growth has undoubtedly come from the pandemic-induced lockdowns. It floated to a warm analyst reception, with many rating it a buy. The company has a market cap of £1.4bn and listed on 2 February at £4.40 a share. Since then, the Moonpig share price has reached a high of £4.72 but has fallen back to £4.20.
While the group has benefited from the temporary stay-at-home economy, I think it will continue to have a bright future ahead. It ultimately takes the hassle out of physically choosing and posting a card, so repeat custom accounts for 78% of its revenue. Moonpig has built and maintained a strong position in the UK and the Netherlands.
Prior to Valentine’s Day 2021, the group enjoyed its strongest trading week ever. Along with an increase in orders, it’s seeing a notable increase in average order values too. That’s due to a rise in customers attaching gifts to their card orders.
I personally know a lot more men than women who use Moonpig out of convenience, particularly when working away from home. I think this indicates a hold on a niche market that could remain sticky.
However, there are risks to the business. It’s operating in a highly competitive industry where savvy marketing is vital to keep it ahead of the game. Supermarkets are major competitors, particularly on price and convenience. The gifting market is rapidly evolving, and I think many people are going off physical gift cards for environmental reasons.
While an increase in customer orders boost revenues, it also leads to further expense as the group must invest in delivering quickly. It’s also had to increase temporary staffing levels to meet rising orders. And lockdown-related costs, such as enhanced hygiene and social distancing measures, have also raised expenses. As such it expects underlying earnings before interest, tax, depreciation, and amortisation (EBITDA) for FY21 to roughly match FY20.
I think its sticky customer base bodes well for the future, but its forward price-to-earnings ratio is 32, so it could be considered expensive.
AIM stock risk
Buying AIM stocks comes with liquidity risk. This means there are few buyers and sellers compared with a highly liquid market like the FTSE 100. So if I buy Moonpig shares and then want to sell in a hurry, I may be forced into taking a price lower than I’d like.
Going forward, it’s focused on enhancing its marketing activity to speed up customer acquisition and encourage further growth. It’s expectations for the full year to the end of April are to double revenues year-on-year.
I think the company does have the potential to stay strong, but there are a number of risks and ultimately the share price puts me off investing.
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Kirsteen has no position in any of the shares 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.