The S4 Capital (SFOR:LON) share price has taken a monumental hit recently. Today, it’s sitting at just 30p – more than 95% below its 2021 highs. Is the growth stock capable of a recovery from here? Let’s take a look.
The S4 Capital story
Before looking at recent developments and the potential for a rebound, it’s worth explaining what S4 Capital does and why its share price has tanked.
Founded in 2018 by ex-WPP boss Sir Martin Sorrell, S4 Capital is a digital advertising, marketing, and technology services company that operates in over 30 countries worldwide. Its goal is to build a purely digital advertising and marketing services business that disrupts traditional analogue models.
S4 has worked with some big-name clients including the likes of Google, Amazon (AMZN), Netflix (NFLX), Diageo (DGE), Marriott, Booking.com, and TikTok. At the end of 2023, it had nine ‘Whoppers’ – clients bringing in revenue of over $20 million per year.
Why has the S4 Capital share price dropped?
When S4 Capital came to the market in 2018, investors were very excited about the potential. Previously, Sir Martin Sorrell turned WPP into an advertising behemoth and investors were hoping he’d do it again with this company.
However, things have not gone to plan. Over the last few years, we’ve seen delayed results and multiple profit warnings and these have sent the share price down dramatically.
Recent Q3 results
The most recent profit warning came on 7 November when the company published its Q3 trading update. In this update, the company posted net revenue of £555 million, down from £657 million a year earlier.
Looking ahead, it forecasts a low double-digit decline in its annual like-for-like net revenue and said that it expects full-year operational core profit to be slightly below last year’s level. This profit warning (the second in two months) sent the S4 Capital share price down 17% to a record low.
What’s going wrong?
S4 Capital blamed challenging global macroeconomic conditions and high interest rates for the poor Q3 results and guidance. It said that these trends have impacted marketing spend by some technology clients.
I wonder if there are deeper problems though? Could generative AI be causing problems here? Potentially. Today, an app such as ChatGPT can create an advertising strategy, write copy, design ads, and even analyse campaign performance.
It’s worth pointing out that other digital advertising companies have been performing well recently. The Trade Desk (TTD), for example, recently posted revenue growth of 27% for Q3. So, S4 Capital’s recent performance is a little worrying. The problems seem to be company-specific.
Is a rebound possible?
Is there potential for a share price recovery from here? Maybe.
Currently, the consensus earnings per share (EPS) forecast for 2025 is 6.5p. So, at today’s share price, we are looking at a forward-looking price-to-earnings (P/E) ratio of just five. That’s a very low valuation.
City analysts certainly see some upside potential. Currently, the average share price target, according to Stockopedia, is 72p. That’s more than 100% above the current S4 Capital (SFOR) share price.
It’s worth noting that in the Q3 trading update, the company advised that it remains confident in its strategy and business model and that with its scaled client relationships it is positioned well for growth in the longer term.
Multiple risks
There are a few risks that could derail a recovery though.
One is client concentration. S4’s largest clients are responsible for a large chunk of its overall revenue. If it was to lose one of these clients, revenues could be impacted materially.
Another is debt on the balance sheet. At the end of Q3, the company had net debt of £180 million. That’s pretty high given that net profit this year is only expected to be around £31 million.
Is S4 Capital a good investment?
Putting this all together, it’s hard to know what to think of this small-cap stock.
On one hand, the company is a bit of a basket-case right now. Current levels of growth and profitability are very disappointing.
On the other hand, the stock looks very cheap. If growth picks up, the share price could move sharply higher.
Overall, I see S4 Capital as a high-risk, high-reward small-cap stock. It could be worth a punt today but it’s a risky investment.
Disclaimer: Edward Sheldon has positions in Amazon and Diageo.
Based in London, Edward is a distinguished investment writer with an extensive client portfolio comprising a diverse array of prominent financial services firms across the globe. With over 15 years of hands-on experience in private wealth management and institutional asset management, both in the UK and Australia, he possesses a profound understanding of the finance industry.
Before establishing himself as a writer, Edward earned a Commerce degree from the prestigious University of Melbourne. Complementing his academic background, he holds the esteemed Investment Management Certificate (IMC) and is a proud holder of the Chartered Financial Analyst (CFA) qualification.
Widely recognized as a sought-after investment expert, Edward’s insightful perspectives and analyses have been featured on sites such as BlackRock, Credit Suisse, WisdomTree, Motley Fool, eToro, and CMC Markets, among others.
You can contact Ed at edward@goodmoneyguide.com
