Why Shares In Iomart Group Plc Are Crashing Today

Cloud computing company Iomart (LSE: IOM) is falling today after the company issued an upbeat first-half trading update. The company reported year on year revenue growth of 28% for the period ended 30 September 2014, adjusted EBITDA growth of 44% and basic earnings per share growth of 26%. 

However, the company’s results failed to meet expectations and it seems as if this is why the company’s shares are falling today. Moreover, today’s results presented a mixed picture, as the company’s reported, adjusted figures presented a completely different picture to unadjusted numbers.

While Iomart reported adjusted profit before tax growth of 27% to £8.0m for the period, unadjusted profit before tax only expanded 26% to £5.5m. Additionally, unadjusted basic earnings per share for the period increased 25% to 4.25p, a far cry from the reported adjusted figure of 6.15p.

What’s more, within today’s release management warned that the registration of new top-level domains at the company’s Easyspace segment, “not played out as many in the industry expected”. Therefore revenue at the group’s Easyspace segment was flat for the period. Overall, group revenue growth was slower than expected. 

Still, Iomart has made plenty of progress over the past six months. The company completed its acquisition of London-based cloud-hosting provider ServerSpace Ltd last week. The group has also been chosen to help Microsoft manage and support its Office 365 product in the cloud.

Too far too fast?

Despite progress made over the past six months, Iomart’s shares have clearly run too far too fast.

Specifically, before today’s decline the company was trading at a lofty forward P/E of 16.3, leaving little room for disappointment if things did not go to plan. Moreover, a forward P/E of 16.3 is based on adjusted earnings figures. Using basic, unadjusted earnings estimates, Iomart was trading at a forward P/E of around 20. 

So, the company’s shares are expensive but there’s more to the Iomart story than meets the eye. For example, earlier this year Iomart became a takeover target and the company’s shares jumped. Sadly, the £300m deal fell through, as management held out for a higher price. Still, there’s a chance that Iomart could become a takeover target once again.

Unfortunately, after today’s declines Iomart has fallen 17.4% year to date, although for long-term holders, over the past five years, Iomart’s shares have risen by more than 300%.

Time to buy?

So, should you buy, sell, or hold Iomart following today’s declines? Well, looking through the results, to me Iomart looks expensive at present levels. That being said, the group is still on the lookout for acquisition targets to drive growth and sales are expanding rapidly.

With this being the case, the company could be a great pick for growth investors but if things start to go wrong, Iomart’s shares could plummet.

But if you think that Iomart would fit well into your portfolio, then the safest way is to use a basket approach. A basket approach uses a basket of risky high-growth shares and reliable dividend-paying stocks, reducing risk and allowing you to sleep soundly at night.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.