It has been a volatile time in stock markets lately. But one growth share I own has done particularly badly, falling 60% over the past year. I do see some challenges for the company that help explain the fall – but reckon the price collapse is a buying opportunity for my portfolio.
Growth challenges
The company in question is digital media agency S4 Capital (LSE: SFOR). The name may not be very familiar, but the company was founded by Sir Martin Sorrell. He was responsible for building advertising giant WPP from scratch. Now he is following a similar path in the digital media world. But he is applying some lessons from his decades at WPP. For example, the way S4 pays for acquisitions is different to the old WPP method, as Sir Martin tries hard to keep founders actively engaged after their companies are acquired.
The growth story here has been very strong, with S4 consistently posting double-digit growth rates. On Thursday the company affirmed its guidance of 25% annual like-for-like gross profit and net revenue growth this year. On top of that, acquisitions could add more revenue and profit streams. So why has this growth share collapsed?
The S4 share price was already moving far down from its November highs, as part of a wider fall tech valuations. But the firm shot itself in the foot by delaying its annual results, then postponing them again just hours before the rescheduled date. That badly damaged confidence in the company’s management among many shareholders, including myself.
The road back
I think that negative investor sentiment continues to dog the S4 share price.
However, the company obviously recognises the reputational damage it has suffered. Sir Martin described the results delay that happened on his watch as “unacceptable”. The firm says it has “already strengthened the control, pricing and estimating functions” in its content practice, the main source of audit problems that caused the results to be late. It is working across the whole company to try and stop any such delay in future.
Meanwhile, I think the underlying investment case for this UK growth share remains strong. A recession could lead advertisers to cut budgets. But digital advertising remains a massive spending area and one I think is set to benefit from long-term growth. S4 has established a reputation for high-quality work, broad geographic reach, and a combination of services that helps clients avoid having to deal with lots of agencies in different markets. I think that adds up to a compelling growth story for the coming decade.
I bought this UK growth share
When the S4 Capital share price crashed after announcing the results delay, I did nothing. I chose not to buy any more of these tech shares until the results were published.
That has since happened: I think the company has learnt its lesson and meanwhile the growth story continues to look strong. But I can now buy the shares much cheaper than before, to hold for years to come. That is why I have been adding more S4 Capital shares to my portfolio.