If you want to see just how brutal the stock market can be, take a look at the recent performance of online competition firm Best of the Best‘s (LSE: BOTB) share price. Riding high at 3,400p back in May, the company’s valuation proceeded to tumble as it reported a softening of trading since lockdown restrictions had ended.
Unfortunately, this downward trajectory has continued today with the BOTB share price crashing 45%, as I type! Is this an opportunity for me to climb on board, or a warning to steer clear?
BOTB share price: what’s gone so wrong?
Today’s trading update covering the 15 weeks to 8 August certainly doesn’t read well for those already holding the stock. Since its last update in June, the company said that revenues from existing customers over this period had been roughly 6% lower than in the previous 15 weeks.
While far from a disaster, acquiring new customers by advertising on social media platforms is beginning to get a lot more expensive — up 60% on that previously paid. That’s problematic when recruiting players this way takes up two-thirds of marketing spend.
With the company subsequently adopting a more cautious approach, new customer revenues have been 40% lower compared to the final 15 weeks of the previous financial year.
Collectively, all of the above has caused average weekly sales to fall roughly 15% over the period. Since a lot of BOTB’s costs are fixed, the company said this “will have a disproportionate impact on margins, profitability and earnings” for the full year. As bad news goes, this is surely the worst of the worst.
Any positives at all?
Clearly, today’s update and the subsequent crash in the share price are awful for those already holding. This isn’t to say all is lost.
For one, revenue is still around 2.5 times higher than where it was in the year before Covid-19. Seen from this perspective, the company is growing well. Moreover, it’s profitable and in sound financial shape. Thanks to its online-only business model, returns on capital and margins have been seriously good too.
I reckon these qualities will eventually shine through and the BOTB share price will settle. Based on the outlook however, I don’t think this will happen for a while.
Hope isn’t enough
Today, BOTB said it was “hopeful” the costs connected to attracting new players to its games will “normalise before too long.” I’m not sure they could have said anything else. Then again, such a vague outlook wouldn’t go down well with me if I were already invested.
A swift recovery in sales, while not impossible, looks unlikely. Yes, a dip in revenue over the summer months is inevitable. Then again, the huge demand for travel in 2021 will clearly take some time to moderate. The fact that BOTB is a highly illiquid stock — and therefore potentially highly volatile — doesn’t help either.
One to avoid… for now
Did the BOTB share price get away from itself in 2020? Based on today’s reaction, it would seem so. And while I do think there’s still a lot to like about the company, it’s hard not to think there are growth stocks with more predictable earnings available elsewhere.
The shares may be worth another look in a few months. For now however, I’ll be steering clear.
Paul Summers 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.