On 20 June, YouGov (LSE:YOU) appeared on my radar as a potential value stock. That’s because the company’s share price nearly halved in response to an unexpected profits warning for the year ending 31 July (FY24).
The data and analytics technology group announced that it expects revenue to be around 5% below the consensus forecast of analysts. And — rather alarmingly — earnings to be 32% lower.
Prior to releasing the news, the company was expected to record an adjusted FY24 operating profit of around £62m. Its shares were trading on a multiple of 15 times this figure.
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It’s now anticipating a profit of £41m-£44m. After the recent fall, its market-cap is currently 11 times higher. On the face of it, the company’s shares are now offering better value than before they crashed.
But I think there are a number of reasons why the position in which YouGov finds itself is more complicated than this.
Doom and gloom
Primarily, there was little positive news to accompany the profits warning.
Sales have been slower than anticipated in its Data Products division with its “fast-turnaround” research services affected the most.
The company also reported “challenges” in Germany, Austria and Switzerland.
And although its newly-acquired Consumer Panel Services business is said to be performing in line with expectations, some of its sales will now slip into FY25.
Also, the company has borrowed heavily to help fund its expansion. At 31 January, its balance sheet disclosed debt of £214m. This is more than the company’s book (accounting) value of £189m.
If YouGov isn’t able to grow its earnings, its ability to borrow more will be restricted. It will then be unable to expand through acquisition, further damaging its earnings growth.
Two magic words
However, despite these warning signs, I believe artificial intelligence (AI) has the potential to transform its business.
For a while now, the company’s been using machine-learning to improve the accuracy of its predictions. It’s also adopted AI to detect and remove ‘suspect’ respondents to its surveys.
But AI models need to be ‘trained’ using vast quantities of data. And YouGov is well placed to provide this information.
The company also has an excellent track record in increasing its profits. During the 13 years to FY23, it grew its earnings per share in 12 of them.
Not convinced
But despite these positive reasons to invest, my confidence in the company has taken a bit of a knock.
On 26 March, the directors told shareholders: “While the overall weakness in macro sentiment may impact the speed and level of some client spending, we remain confident in achieving current market expectations for the full year”.
For the business to decline so badly — in less than three months — makes me nervous. I’m therefore going to watch from the sidelines with a view to revisiting the investment case when I know more about the company’s performance.
