Why is the S4 Capital share price soaring?

The S4 Capital share price reached a new all-time high this week. Our writer looks into why – and what might happen next.

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It can be exciting to see a share one owns increase a lot in price. As a shareholder in S4 Capital (LSE: SFOR), I keep an eye on the share price. It has more than doubled in the past year, reaching new highs this week.

Here is why I think it’s rising – and what could come next.

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Growth story

The S4 Capital share price has risen partly because investors appreciate its ambitious growth targets. The digital ad group plans to double revenues and profits in three years. That is a very aggressive target and notably exceeds the growth rate of many competitors. Moreover, that target is just for organic growth. On top of that will be any growth from acquisitions. As it has been built from scratch in three years, the company has already demonstrated a highly acquisitive streak. I expect that to continue, which could help to boost growth further.

Having a target is one thing – but how is S4 doing when it comes to meeting these lofty growth plans? So far I reckon its performance is strong. Last year, like-for-like revenue growth was 15.2% while gross profit grew 19.4% compared to the prior year. That was despite the pandemic. This year, the company has actually raised its revenue growth target – twice. 

There are risks in speedy growth, however. For example, integrating diverse acquisitions can take management time and effort. If a consistent offering isn’t achieved, clients can move their work elsewhere, hurting profits. That helps explain why S4 recently launched a unitary branding for some of its businesses.

S4 Capital share price and results

Next month the company is due to release its interim results. A lot of expectations are already built into the S4 Capital share price, so there is a risk that even good results could disappoint some investors and lead to a sell off.

Anticipation of the results seems to be helping boost the S4 Capital share price for now. Specifically, many investors will be looking for news of further acquisitions. The company has previously indicated its interest in developing a third business area. This would help it offer a more comprehensive service to its clients, which could help grow the size of client accounts. The company has a “20 squared” objective – having 20 clients which each generate $20m annually in revenues for S4. A third leg to the business would be seen as a key enabler for this.

There is no specific reason to expect a third business division to be announced any time soon. But excitement about the prospect is helping push the soaring S4 Capital share price higher. So if no such development announced in September or coming months, the share price could fall back – perhaps sharply.

Why I’d still buy S4 Capital

With the S4 Capital share price soaring despite the risks above, it might look frothy.

However, I would still consider buying more S4 Capital for my portfolio. Its ambitious growth targets, digital focus, and opportunities for future expansion all attract me. Whatever is shared in next month’s results, the longer-term prospects for the company remain compelling to me.

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Christopher Ruane owns shares in S4 Capital. 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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