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S4 Capital’s share price is rising. Should I buy the stock now?

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One UK stock that’s delivered excellent returns for investors recently is S4 Capital (LSE: SFOR). Over the last year, it’s risen about 250%. Is this a growth stock I should buy for my own portfolio? Let’s take a look at the investment case.

S4 Capital: business description

S4 Capital is a digital advertising and marketing company. Established by Martin Sorrell – who previously founded WPP and turned into a global advertising powerhouse – in 2018, it operates in over 30 countries. Its mission is to create solutions that embrace data, content, and technology for its clients.

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S4 clients include the likes of Google, Amazon, Netflix, and BMW/MINI. You don’t win these kinds of blue-chip clients unless you have a strong offer. Currently, it has what it calls five ‘Whoppers’ – clients with revenues over $20m per annum. Its goal is to obtain 20 Whoppers in the near term.

What I like about S4 shares

There are several things I like about S4 Capital from an investment point of view. The first is that the company is growing rapidly. Last year, it generated revenue of £343m, up 59% on the year before (like-for-like revenue was only up 15.2%).

For 2021 and 2022, City analysts expect revenue of £577m and £757m respectively. That would represent top-line growth of 68% and 31%. It’s worth pointing out that the digital advertising market is expected to grow significantly in the next five years. This should provide tailwinds for S4.

The second thing I like about S4 is the company is founder-led. Research shows that founder-led companies often turn out to be good investments. This is because these companies are usually managed with the right long-term mentality. Currently, CEO Sorrell owns around 10% of the company’s stock. So, his interests are aligned with those of shareholders.

Risks

However, I do have some concerns about S4 shares. One is in relation to the valuation. Currently, City analysts expect the group to generate earnings per share of 12.4p this year. At the current share price of 519p, S4’s forward-looking price-to-earnings ratio is about 42. That’s quite high, in my view.

I think this valuation adds a fair bit of risk to the investment as the stock appears to be priced for perfection. That said, if S4 can increase its earnings significantly in the next 12 months, it could grow into this valuation.

Another concern is that the company doesn’t have a long-term track record as it was only founded in 2018. So, it’s hard to forecast how earnings will grow in the future.

A third concern is that S4 seems quite reliant on the drive and ambition of Sorrell. He’s just turned 76, meaning retirement may not be too far away. So, there’s some ‘key-person risk’ here.

S4 Capital shares: my move

Overall, I think S4 Capital looks a good company. I could be interested in investing at some point in the future. However, right now, I think the valuation looks a little stretched. In my view, the stock has got a bit ahead of itself.

So, I’m going to keep it on my watchlist for now, with a view to buying at a more reasonable valuation.

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Edward Sheldon owns shares in Amazon and Alphabet. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Alphabet (C shares), Amazon, and Netflix and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. 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.

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