Is the tanking S4 Capital share price a buying opportunity?

The S4 Capital share price has crashed this week. Christopher Ruane considers whether this is a chance to expand his position.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

Shareholders in S4 Capital (LSE: SFOR) such as myself have become accustomed to strong growth over the past couple of years. So it has been a rude awakening to see the S4 Capital share price tumble this week. It has lost around 12% since Monday morning, at the time of writing this article earlier today.

Below I explain why this is — and whether I think it could present a buying opportunity to add more S4 Capital to my portfolio.

Strong results but high expectations

Looking at the share price movement since yesterday’s third-quarter trading statement, it’s hard to see why the update would lead to such a sharp correction in the S4 Capital share price.

The company affirmed its plans to double both revenues and profits in the current three-year period. It reported almost 56% like-for-like revenue growth in the third quarter. Adding in the impact of acquisitions, revenue more than doubled compared to the same quarter last year. Gross profit grew 42% like for like, or 92% including acquisitions.

So, why has the market punished S4 for what look like very strong results? I see two main reasons. The first is that the market has very high expectations of S4. The company has frequently upgraded its guidance and announced acquisitions when reporting trading updates. So the lack of an upgrade this time around seems to have caused the market to reconsider the heady share price appreciation of recent months.

Secondly, the company guided that profit margins will be smaller than expected. That is in line with the fact that revenues grew faster than profits. The company said that, as it scales up to serve large clients, it would need to invest more in systems and people. That could lead to smaller profits. A key risk with S4 is that revenue growth brings a higher cost base too, cutting profitability.

Will the S4 Capital share price keep falling?

Maybe there was too high an expectation built into the S4 Capital share price going into this week’s trading statement. So it’s not a surprise that the shares fell back. Indeed, I wrote about the company in August, “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.”

But I don’t think that will last for long if the business continues to perform well.

I think investing in systems and people necessary to grow the business is to be expected. Maybe the signalling around this could have been better managed, but it seems like the right strategic choice to me. S4 now has 7,000 staff and is fast emerging as one of the leading digital ad networks globally. In fact, overly fast expansion hurting service quality is a risk to both revenues and profits at S4. To keep growing healthily, it needs the right staff and technology. I think that’s worth paying for.

My next move on the S4 Capital share price

I remain bullish on S4 Capital. I bought more shares last week. While they have lost value following this week’s update, I do not plan to sell. In fact, I consider the recent price fall as a buying opportunity. I may use it to build my S4 Capital position further.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

More on Investing Articles

Thoughtful man using his phone while riding on a train and looking through the window
Investing Articles

Up another 6% in the last week! Is the BP share price ready to go gangbusters?

The BP share price has been on fire lately. Harvey Jones looks at what's driving the FTSE 100 stock's recovery,…

Read more »

Businessman using pen drawing line for increasing arrow from 2024 to 2025
Investing Articles

High-flying IAG shares are up 50% in 3 months but I still think they’re too cheap to ignore!

Timing the market is almost impossible but Harvey Jones managed it when buying IAG shares in April. Can the FTSE…

Read more »

ISA coins
Investing Articles

Want to earn £1k+ in annual passive income from a £20k Stocks and Shares ISA? Consider this!

Our writer sets out some points to consider when trying to target a four-figure income from one year's Stocks and…

Read more »

Rolls-Royce's Pearl 10X engine series
Investing Articles

3 risks to the Rolls-Royce share price, after its 979% climb

After a 979% growth in the Rolls-Royce share price, our writer still sees things to like in the business. But…

Read more »

Buffett at the BRK AGM
Investing Articles

Can Warren Buffett principles help when looking for AI stocks to buy?

Billionaire Warren Buffett has made a fortune by applying old investing principles to new industries. Can our writer learn some…

Read more »

Portrait of a boy with the map of the world painted on his face.
Investing Articles

Up 36% in 3 months! Is my nightmare purchase of Glencore shares about to come good with a vengeance?

When Harvey Jones bought Glencore shares two years ago, he didn't expect to find himself sitting on a 45% loss.…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

£1,000 invested in Lloyds shares 5 years ago is now worth…

Anyone who’s owned Lloyds shares over the last five years is probably laughing right now with impressive returns that crushed…

Read more »

A mature woman help a senior woman out of a car as she takes her to the shops.
Investing Articles

If a 50-year-old puts £500 a month into a SIPP, here’s what they could have by retirement

Investing £500 a month with a SIPP could build a pension pot worth £269,900 or quite a bit more over…

Read more »