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Last chance to grab shares in Gear4music plc under £7?

Back in December, I focused on three small caps that I believed were set to explode in 2017. Although all have done well so far, one of these — AIM-listed online musical instrument retailer Gear4music (LSE: G4M) — has been the standout performer, rising 43% in just over two months.

Taking into account today’s year-end trading update, I suspect investors will need to move quick if they are to capitalise on this remarkable growth play.

Let’s look at the numbers first.

Sales rise…

For the 12 months to the end of February, UK sales at the York-based company grew by 34% (to £34.9m). While impressive in itself, this figure pales in comparison to sales from Europe and the Rest of the World which saw a massive 124% increase to £21.3m. Particularly noteworthy is the 186% rise in sales in Scandinavia between November and February following the opening of the company’s first European distribution centre in Sweden.

In all, total like-for-like sales for the full year at Gear4music rose to just over £56m — a 58% increase on the previous year. With active customer numbers also rocketing by 49% to just under 340,000, it’s hard to deny that the business is making huge strides in growing its name in the highly fragmented market in which it operates.

Founder and CEO, Andrew Wass was understandably buoyant in today’s update, commenting that the sales growth witnessed was “well ahead” of the board’s expectations at the start of the year. He restated the company’s long-term growth strategy to continue investing in its “people, products websites and operational capabilities“. Wass also declared the board’s confidence in delivering profits for the year “marginally ahead” of its increased expectations in January. 

…while shares dip

Gear4music’s share price was over 4% lower in early trading, suggesting that some investors were keen to take profits. I can’t blame them. With the company’s stock ascending almost sevenfold since hitting a low of just 99.5p during the aftermath of the EU referendum vote, this makes a lot of sense in terms of risk management. Personally, I won’t be joining them just yet.

While the UK sales figures were impressive (and should continue to grow given the company’s relative lack of fixed costs and highly competitive pricing), it’s the company’s massive potential in Europe that lead me to remain bullish on the shares. Assuming its second and newly operational distribution centre in Germany can replicate the success seen in Scandinavia, Gear4music’s presence in the estimated £4bn European market can only get larger.

Longer term, who’s to say where things might end up. I don’t think it is completely unrealistic to suggest that the company — like high growth peer, Boohoo.Com — could turn its attention to the US. I’ll be on the look out for clues on the company’s medium term intentions when its releases its full-year report to the market in May.

A stock trading around 60 times forecast earnings for 2018 should send shivers down the spines of most investors but this metric is of arguably less importance when attempting to value a growing company like Gear4music. Moreover, the fact that only 58% of shares in the company are available to investors means that further good news could act as a catalyst for large share price gains.

Given the above, I feel it’s only a matter of time before Gear4music’s stock breaks through the £7 barrier.

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Paul Summers owns shares in Gear4music. 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.