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Are S4 Capital shares worth buying?

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S4 Capital (LSE: SFOR) shares keep rising. The stock was up almost 4% yesterday. And since the beginning of the year, the share price has risen by nearly 50% and has increased by 115% in the last year.

S4 Capital shares are also trading close to all-time highs. So I’m worried that the stock may be sensitive to any negative news. The company is due to release it half-year results on 13 September. So for now, it’s on my watch list.

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What’s behind the rise?

I think there are a few reasons behind the stock price rally. The first one is that S4 Capital is the brainchild of Sir Martin Sorrell who has a strong reputation in marketing. It’s worth noting here that he was the driving force behind growing WPP into a FTSE 100 company. So of course, his latest venture S4 Capital is going to attract a lot of attention. 

But this isn’t the only reason I think the shares have risen. The firm offers purely digital marketing and advertising services. Given how the pandemic has been a catalyst for the world to go even more digital, I reckon this has also pushed the share price higher. Companies that didn’t think they needed digital marketing before are probably realising that they require it now more than ever. And with Sir Martin’s name behind the firm, it’s a double whammy.

Digital

According to the company, digital is the fastest growing segment of the advertising market. S4 Capital estimates that last year, this accounted for over 50% (or $290bn) of the total global advertising spend of $525bn — excluding over $500bn of trade promotion marketing, the primary target of the Amazon advertising platform.

What’s encouraging is that it projects that by 2022, the digital share will grow to approximately 60% and by 2024 to roughly 70%. It reckons that Covid-19 has accelerated this growth. To me, these numbers are pretty staggering. And it highlights that with S4 Capital’s pure digital offering, it’s in a prime position to exploit this opportunity.

Risks

While this is all great news, the stock does come with risks. As I said, it’s trading close to all-time highs, so it’s going probably going to be affected by any negative news. This could include a slowdown in growth.

My other concern is that 55% of the company’s 2020 revenues were derived from tech clients. This was over half of its annual sales last year, which I find somewhat worrying. If the industry suffers, this could impact S4 Capital shares.

Should I buy?

I think things look promising for the company. It’s operating in a sector where the growth potential is huge. That said, I think this is already reflected in the share price, especially given the rise during the pandemic.

The revenue concentration from should, in time, reduce as the firm scales and grows its client base. And this is something I’m keeping my eye on.

I’ll also be looking out for its interim results in September as well as an update on its progress and outlook. For now, I’m watching the stock but not buying yet.

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Nadia Yaqub has no position in any of the shares mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. 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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