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S4 Capital’s share price continues to rise. Should I invest now?

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One UK stock that has a lot of momentum right now is S4 Capital (LSE: SFOR). This year, shares in the tech-led digital advertising company have risen about 33% (versus 10% for the FTSE 100 index). Meanwhile, over 12 months, the SFOR share price is up about 115%.

As I’ve said before, there’s a lot to like about S4 Capital shares. Is now a good time for me to buy the stock for my portfolio though? Let’s take another look at this exciting UK growth stock.

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Why S4 Capital’s share price is rising

Since I last covered S4 Capital shares, on 7 April, updates from the company have been very encouraging. First, there was a great first-quarter trading update in early May. Here, the company posted revenue growth of 71% and gross profit growth of 71% for the first three months of the year.

During the period, all regions showed strong growth. As a result of this good performance, S4 said it would target 30% gross profit growth this year (up from 25%).

Then, there was a very positive AGM Statement on 7 June. Here, the company advised that for the first four months of the 2021, revenue was up 90% and gross profit was up 84%. On the back of this performance, the company upgraded its guidance again. It’s now targeting gross profit growth of 35% this year.

Looking at these updates, it’s clear that S4 Capital has a lot of momentum right now.

3 risks to consider

However, there are a few risks to consider here. One is integration risk. S4 is growing both organically and through mergers and it’s executing deals with other digital advertising companies at a rapid rate. Mergers and acquisitions don’t always go to plan. The company may also need to raise capital in the future to fund deals.

Another is key-man risk. S4 Capital is spearheaded by advertising legend Sir Martin Sorrell, who previously built WPP into a global advertising powerhouse. Sorrell is now aged 76, so retirement may not be far off.

Finally, there’s the valuation. When I last covered S4 Capital shares in April, I said the valuation was a bit too high for me. Since then, the stock’s forward-looking price-to-earnings ratio has climbed higher, from 42 to around 51! At that multiple, I see the stock as fully-valued.

If we use the earnings forecast for the year ending 31 December 2022 (17.3p per share), the P/E falls to 38. That’s more reasonable, but still pretty high. It doesn’t leave a huge margin of safety.

S4 Capital shares: my move now

I continue to think that S4 Capital looks like an interesting company. Its growth is certainly very impressive. However, given the high valuation, I’m going to leave the stock on my watchlist for now.

The stock is just a little bit too expensive for me at present. 

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Edward Sheldon 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.

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