In these gloomy days for the stock market, it’s nice to see some glimmers of positivity. That happened Tuesday when small cap stock Gear4Music (LSE: G4M) saw its share price leap 20%. The occasion was the release of full-year results. But the G4M share price has been having a remarkable year all round.
The company, which sells musical instruments and music equipment online, suffered a hefty crash in the early days of the Covid-19 lockdown. But in April, chief executive Andrew Wass revealed growing demand, explaining that “an increasing number of people recognise the benefits that playing musical instruments can bring during these difficult times“. Music does indeed appear to have charms to soothe the frustrated lockdown victim, and that thought has already gone viral.
Tuesday’s results announcement, headlined “Strong return to profitability“, confirmed the uptick in the company’s performance. The G4M share price reacted with a 25% gain at one stage. It’s softened a bit by the time of writing, but still up 20% on the day. Since the start of 2020, we’re looking at a 50% increase. Not many companies have rewarded their shareholders so handsomely in this torrid year.
Cracking customer growth
Gear4Music delivered a 239% rise in EBITDA, from £2.3m a year ago to £7.8m. That came from a modest 2% increase in revenue, so margins are heading in the right direction. The firm’s gross margin improved from 22.8% a year ago to 25.9%, which is impressive. G4M had cash of £7.8m on its books at 31 March, a significant improvement on 2019’s £5.3m. The active customer count grew by 11% to 807,000, with the company speaking of “exceptionally strong trading in April and May 2020“.
Before we get too excited, to evaluate the G4M share price valuation we need ask ourselves a key question. Is this is just a one-off lockdown surge, or is it part of a long-term growth trajectory? CEO Wass did add that “whilst still early in the current financial year, the Board is confident of continued financial improvements during FY21 and look forward to the year ahead with optimism“.
That’s upbeat, but the rest of 2020 will still be blighted by coronavirus restrictions. And it surely won’t be representative of a long-term future in which we’re back to shopping as normal. Assuming we ever are back to shopping as normal, that is.
G4M share price cheap?
So where does that leave investors? Well, I do see the G4M share price as an attractive growth opportunity now. But, as with just about all growth shares in their early days, it’s pretty much impossible to come up with a meaningful valuation.
The bottom line earnings per share (EPS) figure of 12.4p does at least make it possible to work out a trailing price-to-earnings ratio. It comes out at around 30. But if Gear4Music really is in for some years of steady EPS growth now, that could be essentially meaningless at this stage.
A younger me, back when I invested mostly in growth stocks, would buy Gear4Music shares today. The current older me will wait another year to get some further idea of G4M’s likely long-term trend.