Shares in UK market research and data analytics firm YouGov (LSE: YOU) took a huge hit yesterday (20 June). When the market closed at 4.30pm, the growth stock was down a whopping 46%.
So, what was behind this massive fall in the share price? And should investors consider buying the stock after the sharp decline?
Profit warning
The enormous drop yesterday can be attributed to a nasty profit warning from the company.
In a trading update, the company advised that following its half-year results, posted in late March, it had seen lower sales bookings than anticipated. As a result, it now expects group revenues for FY24 (the financial year ending 31 July 2024) to be approximately £324m to £327m (the consensus forecast was for £341m).
It also said that it expects full-year group adjusted operating profit to be £41m to £44m. Given that H1 adjusted operating profit was £27.9m, we’re looking at quite a big drop in profits between H1 and H2.
It’s worth noting that Peel Hunt analysts said that the new guidance for adjusted operating profit was 38% below their previous forecast.
As a result of the profit warning, analysts at Berenberg have reduced their earnings forecasts for the year ending 31 July 2025 by 19% to 44p.
Low valuation
After the big drop in the price, the shares do look quite cheap to me.
At the new price of 440p, the forward-looking P/E ratio is only about 10 if we use that earnings forecast from Berenberg.
That seems low for a company that:
- Operates in the fast-growing data industry.
- Grew its revenues from £117m to £258m between FY18 and FY23 (a compound annual growth rate of 17%).
- Generated an average return on capital employed (ROCE) of 16% between FY18 and FY23.
Balance sheet issues
One thing that turns me off the stock a little, however, is the balance sheet.
You see, in July last year, YouGov acquired the Consumer Panel Business of GfK SE for €315m.
And this involved taking on a lot of debt. At the time, the company took on a term and revolving credit facility of up to €280m.
So today its balance sheet isn’t super-strong.
At the end of March for example, the company had long-term debt of £232m versus equity of £189m on its books.
This debt could become more of an issue now that profits are going to be significantly lower than expected.
It’s worth pointing out that at the end of H1, YouGov had goodwill and intangible assets of £416m on its books. This means that the company had a negative net tangible asset value (NTAV) of -£227m.
Long-term potential
On balance though, I think the shares are probably worth a closer look after their big drop. My gut feeling is that they’re now quite cheap.
I’m not expecting a rebound in the share price overnight after the profit warning. But I think long-term investors could be rewarded.
