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The iomart share price recovery is faltering. I think I’m seeing a buying opportunity

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Cloud computing specialist iomart Group (LSE: IOM) showed one of the most promising early recoveries from the 2020 stock market crash. When Covid-19 hit, the iomart share price fell heavier than most, quite a bit harder than the FTSE 100. But by the end of May 2020, it had regained much of the loss.

I don’t find that surprising. iomart’s services enable people to work from home. And that was one of the few big growth stories of 2020. But, later in the year, iomart shares started to fall back again. The change occurred just before the markets in general started to recover on the back of positive vaccine progress.

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The share price slide has accelerated this year, and in the past month we’ve seen an 11% drop. Cumulatively, that’s a 20% fall over the past two years, for what was looking like a long-term growth story.

Are these events related? Did investors buy when the prospects for home working looked strongest? And are they selling now we’re all closer to getting back to conventional work practices? That does seem likely to me.

The financial situation

We’re on for a drop in iomart’s earnings for 2020-21. Analysts do, however, expect longer-term earnings growth and have a rise pencilled in for the following year.

The most recent update from the company came earlier in April. For the full year, iomart expects to report pretty much unchanged revenue — approximately £112m, compared to £112.6m a year previously. Earnings are set to dip, though. The firm says adjusted EBITDA should fall 4.6% to approximately £41.5m. And adjusted pre-tax profit should be down 12% to around £20m.

It spoke of “a drop in non-recurring hardware reselling activities as customers delayed investment decisions“. And that’s put a squeeze on margins. In the current economic circumstances, I’m not surprised. Just about every company I’ve been looking at over the past year has been cutting costs and delaying expenditure.

But cash flow looks strong. The year-end cash position strengthened from £15.5m at 31 March 2020, to approximately £23m. iomart has “maintained its sales team throughout the Covid-19 pandemic in order to position the company optimally once business confidence returns“. And it has not used any furlough support.

Should I buy iomart shares?

So what do I think about investing in iomart at today’s price? I’m torn, as I always am with growth stocks around this stage of their development. I see two downside threats, at least for the next year or two. One is perhaps more obvious, that the economic effects of the pandemic could go on longer than we might think. While any boost for home working is good, companies reining in their spending on infrastructure is not.

I also think we could be seeing a typical cooling off that happens with so many growth stocks. All we need is a slowdown in earnings progress, and many investors will sell, hold back, and wait for growth to reestablish itself.

But looking at the wider picture, I reckon the lockdowns have helped accelerate the trend in remote and flexible working that was always going to happen. And that should be a boon for companies like iomart. It’s on my list of potential long-term buys.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Iomart Group. 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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