Consultancy group Elixirr (LSE: ELIX) has had an excellent run of late. The Elixirr share price has gone up by 183% in the past year. It increased 23% this week alone.
Here I consider whether Elixirr shares could keep climbing rapidly.
Elixirr: a business growing fast
The reason for the Elixirr share price growth this week is the company’s interim results, published on Monday. They showed strong business growth. Compared to the same period last year, revenues grew by 77%. Pre-tax profit showed an even more impressive increase, of 145%.
There is more to like about the company’s financial performance. The debt-free business has net cash of £21.1m. It also reported a “strong pipeline for the remainder of the year”, leading the company’s board to upgrade full-year revenue expectations for the second time.
So far, so good. There are shades here of the sort of growth seen at a company in my portfolio, S4 Capital, which has also upgraded its own expectations for the year multiple times.
The challenge of scaling consultancy
However, it’s worth noting that whereas S4 has a purely digital focus, Elixirr is using a more traditional consultancy business model. It styles itself as “The Challenger Consultancy”. But ultimately, consultancies rely on paying skilled professionals to win and deliver work. So even if a lot of the work is delivered digitally, I see inherent limitations to the scaleability of Elixirr’s business model.
Consider, for example, the company’s comments on part of its growth strategy in the interim results. Under the growth pillar “Stretching existing partners”, the company noted that it “increased revenue per client-facing Partner in H1 21, while continuing to grow the Partner team”.
That reflects typical ways in which consultancies can grow revenues. They can get fee earners to bill more, hire more staff, or a combination of both. Elixirr seems to be doing this well, given its strong growth in the half. But there are inherent limitations to such an approach. Those include the ceiling on prices customers will accept, and the availability of the right talent pool. A consultancy model which relies on fee earners is inherently limited in how many customers it can serve without significantly adding to its cost base. That isn’t true in the same way in a digital business model.
The Elixirr share price and expectations
While the first half performance was excellent, in absolute terms the numbers are still fairly modest. Revenue was £24m and pre-tax profit came in at £6.4m.
The company has a market cap of £312m. Using the interim earnings, that equates to a prospective price-to-earnings ratio of around 24. I think that is high for any consultancy. A key part of what differentiates consultancies from competitors is their people. But they can simply walk out of the door any day of the week. Elixirr’s intellectual property, client relationships, and reputation give it some competitive advantage. But at its heart, a consultancy relies on retaining talent. That can be costly to do, eating into profits.
I am impressed by Elixirr’s growth rate. But I think the valuation looks full for a consulting business. Given the investor enthusiasm demonstrated this week, I do think further good news could lead to more dramatic increases in the Elixirr share price. But I won’t be buying.
