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What’s going on with the S4 Capital share price?

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It’s been a great 2021 for the S4 Capital (LSE: SFOR) share price. The stock is up over 30% and has increased more than 110% during the past year. Of course, previous performance isn’t an indication of future returns.

So would I buy shares in the digital marketing and advertising company? Well, for now I’ll just be watching the share price. I think the company has lots of potential, but I’m not ready to dip my toe in just yet.

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The firm

S4 Capital was established by Sir Martin Sorrell in May 2018. This founder is a key figure in the world of marketing. After all, he was the brains behind WPP, the FTSE 100 advertising and PR group. But he left and used his own money as well as some from investors to set up S4 Capital.

Since then, the firm has been growing at a staggering rate. Last year, revenue increased by 59% to £343m compared to £215m in 2019. Profitability has been improving too. It went from a loss of £9m to a profit before income tax in 2020 of £3m. So things are moving rapidly and I could be looking at a much larger firm in the company’s next financial year.

It even describes itself as going “from peanut to a unicorn” in a short period of time. S4 Capital currently has a market cap of almost £4bn. That’s pretty good going in three years. But it always helps when there’s a high-profile founder involved.

The founder

Speaking of Sorrell, there’s no denying he has so far done a great job. I’m certainly not dismissing this. But I question whether the firm would have any credibility without him. It seems to me that the key to growth is Sorrell himself, which adds an element of ‘key-person risk’.

While he’s the Executive Chairman of the company, he’s also 76 years of age. How soon will it be before he retires? Sorrell does have a 10% stake in the firm so he has skin in the game. But maybe he’ll decide one day to sail off into the sunset. At present, I can’t help but feel that S4 Capital is very reliant on him.

S4 clients

Over 70% of the firm’s gross profits come from The Americas. And 55% of last year’s revenue came from tech clients. My concern is that revenue seems to be concentrated among just few customers. If the tech sector is hit, then marketing budgets could get slashed, which could impact the S4 Capital share price.

The company is working to widen it customer list. So far it has what the company calls five “whopper” clients secured or in sight. But its goal is to have 20 customers generating over $20m in revenue each. It continues to build relationships with the likes of Google, Facebook, Amazon and Netflix. And it has secured business from companies such as PayPal and Shopify.

I like that S4 Capital has clear and ambitious goals to grow. Of course, this will take time. But the client concentration so far, makes me a little uneasy.

Should I buy?

I like what S4 Capital is doing and the strong growth is appealing. But the share price is close to its all-time high and is likely to be sensitive to negative news. For now, I’ll only add the stock to my watchlist.

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Nadia Yaqub has no position in any of the shares mentioned. 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. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. The Motley Fool UK owns shares of and has recommended Alphabet (A shares), Alphabet (C shares), Amazon, Facebook, Netflix, PayPal Holdings, and Shopify. The Motley Fool UK has recommended the following options: long January 2022 $1,920 calls on Amazon, long January 2022 $75 calls on PayPal Holdings, long January 2023 $1,140 calls on Shopify, short January 2022 $1,940 calls on Amazon, and short January 2023 $1,160 calls on Shopify. 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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