On 27 July, Moonpig (LSE: MOON) released its results for fiscal year 2021. Despite more than doubling its revenues, investors reacted negatively. Since the results, the Moonpig share price has declined 23%. I think this could be a big opportunity to jump in. Here’s why.
The positives
First, I think Moonpig is an excellent business. It has a strong competitive advantage with two recognisable brands in the online greetings card market in the UK and the Netherlands. This has enabled the company to gain a dominant position in both markets with a 60% and 65% share, respectively. Moonpig also has an asset-light business model, only using around 4% of revenues for capital expenditure. This helps it to maintain an impressive gross margin of over 50%. It also helps the company achieve a very high return on capital employed, which hit 72% last year.
Secondly, Moonpig’s financial performance has been very strong. This year (FY21), the company managed to generate revenue of £368m. This is an increase of 113% from the previous year. Adjusted earnings-before-interest-taxation-depreciation-and-amortisation (EBITDA) also more than doubled during the year as well.
As restrictions are lifted and in-store purchases become possible once more, Moonpig’s revenues are expected to fall. Current estimates are for revenues to fall between 29% and 32% next year (FY22). While this is a big decline, it would still represent growth of between 45% and 50% over two years from FY20. After FY22, management expect steady growth in the mid-teens in the medium term. As margins are unlikely to change significantly, underlying earnings should also follow a similar pattern. This leaves me optimistic about the long-term financial performance of the company and, therefore, the Moonpig share price.
Valuation
If one-off expenses are excluded, Moonpig shares are currently trading at a trailing price-to-earnings (P/E) ratio of 21.1. This is high, but actually looks very low for a company that just doubled its revenues. However, as underlying earnings are forecast to decline substantially next year, a forward P/E ratio is more appropriate. I estimate that Moonpig has a one-year forward P/E ratio of 30. To me, this is attractive for a company expected to grow in the mid-teens in the medium term.
Risks
In my opinion, the primary risk associated with the Moonpig share price is the uncertainty regarding the future growth rate of the company. If management has underestimated the impact of the pandemic on the business, then it could be overestimating how well it will do in the future. Should the medium-term growth rate fall significantly, Moonpig shares will start to look overvalued.
Having said this, given that Moonpig has grown so quickly in the past and is a high-quality business, I am inclined to believe the forecasts issued by management. As a result, I have decided to add Moonpig shares to my portfolio.
