Online greeting cards and gifts

As a reminder, Moonpig is an online-only greeting cards and gifts business based in the UK. The premise is that you can craft a greeting card for loved ones, customise it, and send it directly to them. I must admit I use online greeting cards a lot, including Moonpig’s services, due to the ease and the customisation element.

It is worth remembering that Moonpig shares only became available in February 2021 via an initial public offering (IPO). The IPO price was 423p. As I write, the shares are trading for 159p, which is a 62% decline over approximately 18 months. Over a 12-month time period, they’re down 49% from 314p to current levels.

The investment case

I believe that Moonpig is a growth stock. Unfortunately for it, it is attempting to grow its business, performance, and investor sentiment against the backdrop of economic volatility. This is partly the reason for the share price drop, in my opinion.

So let’s take a look at Moonpig’s annual report for the period ended 30 April 2022, released back in July. It was a mixed bag for me, but it did report that overall it was happy as a business that it was headed in the right direction.

Revenue dropped slightly compared to 2021, as did gross profit. Order numbers also dropped. From a bullish perspective, it said that it had managed to cut costs, previously linked to technology and infrastructure implementation, and had also managed to increase its market share in the online greeting card market.

As part of reviewing any stock I am looking to buy, I refer to previous performance. I note that Moonpig’s 2021 performance was exceptional. I believe this may have been a tad over-inflated due to the restrictions in place due to the pandemic. Perhaps 2022 results are a more accurate reflection of where the business is currently at.

At the moment, macroeconomic headwinds are affecting many FTSE 250 stocks. Moonpig is not immune to these issues, which include soaring inflation, the rising cost of raw materials, as well as the global supply chain crisis. Rising costs for a business like Moonpig threaten levels of profitability. Supply chain issues could affect its ability to deliver certain products to its consumers. I believe some of these issues have affected its most recent results.

A FTSE 250 stock I will continue to watch

In conclusion, I have decided to maintain the same stance as the last time I reviewed Moonpig shares. I will keep them on my watch list for now. Current headwinds, as well as increased competition in the market help me come to my decision. I believe there are better stocks out there for me to add to my holdings right now.

A recovery with high volatility

The first stock in question is CMC Markets (LSE:CMCX). As a retail trading platform, the company has experienced high growth since the start of the pandemic. However, this growth has been stunted recently, something that has been reflected with the 39% fall in the share price over the past year.

In the full-year results released last month, the company noted a fall in profit due to the lack of “unusually significant trading volumes” from Covid-19. Net operating income fell by 31% versus the financial year ending 2021. However, income was still up 12% on a two-year basis, when comparing it to the pre-pandemic year.

In my opinion, the stock is a good growth buy for 2022 onwards. I’m not going to get caught up too much in the year-on-year decline in finances, as the pandemic artificially boosted numbers. Yet if high volatility was a gauge that helped to increase profitability for the company, then the 2022 financial year should be strong. So far this year we’ve experienced soaring commodity prices, falling stock markets and whipping currency action. All of this should aid CMC Markets.

The main risk to my view is if numbers continue to fall in the next trading update. This could cause any momentum generated during the pandemic to be lost completely.

A newly-listed growth stock

The second company I’m thinking about buying shares in is Moonpig (LSE:MOON). It’s another classic case of a growth stock hindered by the market cycle. The online card and gifting business increased turnover rapidly over the past few years, leading to the business going public in February 2021. The uncertainty and concern around stocks in recent months mean that the share price is down 52% over the last year.

Revenue for 2021 fell by 17.3%, however the EBITDA margin remained at a very healthy 24.6%. If this kind of profit margin is retained for the coming years, I think the business will be able to post a profit (or at least avoid a hefty loss).

Further, I think that if we do enter a stock market recovery, demand should be strong for products. The card side of the business should have consistent demand through good times and bad. Yet the experiences side of the business (an area of investment for the company) is more sensitive to consumer demand. So if we see the economy pick up, I think this division could really take off.

One concern I have is the fact that some big investors sold out recently. Back in May, some early stage institutional investors sold shares, which could have been linked to the end of the tie-in period to hold the shares after the IPO.

I’m talking about Moonpig Group (LSE: MOON), which has seen its share price tumble in early trading. But can the company, listed on the London Stock Exchange for little over a year, recover from today’s setback? Let’s explore.

Poor financial results

At first glance, the FY22 results are grim reading for shareholders in the online greeting card and gift platform. Group revenue declined 17.3%, adjusted EBITDA slumped 18.7%, and adjusted pre-tax profits collapsed 30.9%.

Traders reacted badly to the news, with the Moonpig share price plummeting by 9% during this morning’s action. This latest selloff isn’t something new, however — Moonpig shares have fallen 46% since they were first listed.

The relative declines in various metrics year-on-year are largely down to the company’s impressive pandemic performance as consumers were driven to online purchases during successive lockdowns.

The return to bricks-and-mortar shopping was always going to pose a challenge for businesses that operate exclusively online, and this FTSE 250 stock is no exception. Nonetheless, there’s still plenty here that gives me cause for concern.

Can pigs fly?

Despite worrying headline figures, the financial results weren’t all bad. I’m encouraged by a 28.3% reduction in net debt to £83.8m. Cash generation is also fairly robust. Gross cash and cash equivalents increased to £101.7m from £66m in 2021.

Additionally, revenue growth of 75.8% on a two-year basis looks a lot better than a measurement against the company’s pandemic boom. This is testament to significant growth in Moonpig’s customer base, which bodes well for the future in my opinion.

We remain confident in the outlook for the current year. The long-term opportunity remains vast and we have never been in a better position to capture it.

Nickyl Raithatha, Moonpig CEO

Turning to the forecast for FY23, the business has reconfirmed existing guidance, namely a target for mid-teens percentage underlying revenue growth over the medium-term.

The group can also look forwards to an acquisition of gifting experience outfit Buyagift at an agreed price of £124m. This takeover should provide Moonpig with a plethora of cross-selling opportunities across the gifts market considering Buyagift’s substantial UK footprint, 3.3m customers, and partnerships with 4,400 companies. The transaction is expected to complete by the end of July and Moonpig anticipates it will be margin accretive.

It’s also worth noting the strength of the brand. Competitors, such as Funky Pigeon, which is owned by WH Smith, and Card Factory straggle far behind in terms of market share. Customer loyalty is perhaps the company’s greatest asset in my view.

Would I buy this FTSE 250 stock?

Moonpig certainly has an interesting history from its origins as the brainchild of Dragons Den star Nick Jenkins at the turn of the millennium to today’s position as a FTSE 250 stock. However, this morning’s results have poured some cold water on my enthusiasm for the company. A possible flight to the moon has been delayed in my opinion.

Although I still see a great deal of potential, this is one share that will remain on my watchlist for now. I won’t be buying today.

Wise (FY22 earnings)

Wise (LSE: WISE) is a fintech company that provides a money transfer service. It allows customers to send money abroad and get paid in other currencies. Wise is expected to unveil its FY22 earnings results for the year ending March 2022 on Tuesday 28 June.

Although there’s no previous record to compare with in terms of earnings per share (EPS), the earnings preview indicates that revenue is expected to grow by 32%. This is seen as generally positive as Wise continues to take market share from the likes of PayPal and Western Union. Having declined over 60% since its initial public offering, a better-than-expected number on its top and bottom lines could see the Wise share price recover from its bottom.

Moonpig (FY 22 earnings)

Moonpig (LSE: MOON) is an internet-based business. The company makes its money mainly from selling personalised greeting cards, flowers, and gifts. The FTSE 250 firm is expected to release its FY22 earnings results for the year ending April 2022 on Wednesday 29 June.

Moonpig is expecting to show a slight decline in revenue for the most recent year. This is due to the slowdown in sales after the pandemic. Nonetheless, the online business is still expecting its revenue to come in above pre-pandemic levels, with its bottom line also showing an improvement.

Mulberry (FY 22 earnings)

Mulberry (LSE: MUL) is a British fashion company. It is best known for its luxury leather goods, particularly women’s handbags. The small-cap company is expected to post its FY22 earnings results for the year ending April 2022 on Wednesday 29 June.

The earnings preview points towards a slight growth in revenue despite a slow down in retail sales lately. This is due to its status as a luxury brand. Due to a lack of liquidity in the stock, its share price has largely stayed unmoved this year. Consequently, there’s a lack of coverage on the stock. Nonetheless, higher revenue with a better EPS could have investors jumping for joy, sending the stock higher.

A complete gifting experience

The first growth stock I’m thinking about buying is Moonpig (LSE:MOON). The online greeting card company went public back in February last year. Over a one-year period, the share price is down almost 47%.

The year high of 478p is almost double the current price of 251p, showing that upside potential isn’t an impossible dream. Personally, I think that the outlook for the business has improved with recent developments.

For example, it announced late last month its intention of buying Smartbox. This company owns Red Letter Days, a popular gifting and experience company. The synergies and enhancements that this could add to Moonpig’s existing offering is huge in my opinion. Given the potential financial growth of the combined entity, I think that the share price could have large upside in coming years.

I also like the fact that the growth stock isn’t content with just being a greeting card business and is actively expanding its reach. Its finances should be supportive of future investment, given that the company has a large adjusted EBITDA margin of 24%-25%.

As a risk, I did note recently that some early stage shareholders sold out. These asset managers could just be exiting their holdings for capital reasons. But if it’s more that these professionals don’t see any future benefit for this top growth stock, that is a concern for me.

Top growth stocks with long-term value

The second growth stock I’m looking to buy is Hargreaves Lansdown (LSE:HL). I appreciate that the share price is bleeding lower almost everyday. It’s down 50% in the past year and is at levels not seen for almost a decade.

This does make me cautious, and so I’m looking to buy in chunks over the next few months rather than all in one go. This can help me to achieve a better average price if it keeps falling.

My conviction for thinking that the share price could rally is based on a planned transformation of the business that was announced earlier this year. The company is aiming to become a lot more efficient in the existing retail investing operations, as well as focusing heavily on wealth management.

The wealth management sector is growing at the moment and also offers higher revenue potential from advisory fees rather than just commissions from booking trades for investors. I think that this growth stock could take off as it has the customer base already, so should be able to reinvent the business in coming years.

In the May trading update, it noted client growth of 90,000 this year to date, with a client retention rate 92.4%. If it can pivot these clients to wealth management, I think the sky is the limit for the share price. The big risk is if these new clients aren’t in the target market, in which case false optimism could exist about the revenue potential.

AO World

I’ve been bearish on electrical retailer AO World (LSE: AO) for, well, years. The huge spike in the share price during 2020 did little to arrest my fears that this company would struggle to outgun rivals in what’s an incredibly competitive space. Well done to anyone who managed to play this momentum game and win.

The actual date on which full-year numbers will be revealed is still to be confirmed. Even so, I think I can safely say they won’t be good. The company has already reported that customers are cancelling warranties as the cost of living climbs. I can’t imagine a lot of people are rushing to buy white goods right now either.

The question is whether this is still to be fully reflected in the shares. Despite tumbling 27% in 2022 to date and 70% in the last 12 months, I’m not sure it is.

I’m not alone. The small-cap continues to feature in the list of most shorted stocks on the UK market.

Of course, AO could bounce hard if it reports even slightly better-than-expected trading. But that level of speculation is better suited to traders rather than Foolish investors like me.

Moonpig

Greetings card supplier Moonpig (LSE: MOON) is a second growth share I’ve long been wary of due to the hyper-competitive market in which the firm operates.

Again, my cautious stance has been vindicated. Moonpig’s share price is down 37% in 2022 and 50% since last May.

This isn’t to say there’s nothing to like here. It’s got a decent brand (boosted by that memorable jingle) and has been busy building a more diversified selection of gifts on its site. The company also upgraded its revenue target for the year from £285m to roughly £300m back in April.

However, a valuation of 20 times earnings still strikes me as rich considering the lack of ‘economic moat’ (as Warren Buffett would say). Customer loyalty levels may be above pre-pandemic levels but that may reflect the migration of shoppers online rather than anything about Moonpig specifically.

Naked Wine

Like AO World, drinks seller Naked Wine (LSE: WINE) was a huge beneficiary of the multiple UK lockdowns. Understandably, that purple patch could only last so long. Accordingly, this growth share is down 43% in 2022 and almost 60% in one year.

There’s an argument that a bottle of wine is just the sort of cheap luxury that people will treat themselves to in tough economic times. Once again, however, I’m struggling to discern any true advantage over rivals. For many people, I imagine a bottle of plonk from the nearest supermarket may suffice. I could be wrong, of course, and ominously, Naked Wine also appears on the list of most-shorted stocks too.

I can see things getting worse before they get better for the Norwich-based business.

Full-year numbers are due on 9 June.

To the moon

Moonpig (LSE:MOON) is a greetings card company, which has expanded the offering into gifting as well. The business has grown over the past few years, and went public in Q1 2021.

Its growth in revenue can be seen from the half-year results released back in December. To provide more accurate comparisons, a two-year performance was included. The half-year growth in revenue versus 2019 was 115.2%. Adjusted profit before tax was up 147% on the two-year comparison.

I think that the business is well positioned going forward. It has a dominant position in the online greetings card market. Further, I like the expansion into broader gifting ideas. This not only makes it less reliant on the cards division, but also allows it to grow at a quicker pace.

The share price is down almost 50% over a one-year period. However, I think that this was more to do with it being overpriced at the IPO stage. Even at the current level, the price-to-earnings ratio is 88. This is well above the FTSE 250 average.

Some might see this as a risk, which I do accept. Yet by the very nature of top growth stocks, it’s going to be high. Investors think that future earnings will grow, so often view the share price based on future potential, rather than current earnings.

Top growth stock in private equity

A second top growth stock that I like at the moment is Harbourvest Global Private Equity (LSE:HVPE). The share price is up 28% over the last year. This might not fit in with the traditional growth stock on the surface, but stay with me

The private equity business is all about investing in other companies that aren’t directly listed. These could be small companies needing funding to grow, almost like Dragon’s Den-style venture capital. Or it could be mature companies that are underperforming and are bought with the aim of being turned around.

So within the portfolio, there should be some exciting options for future growth prospects. This benefits me as when the value of the individual company rises, the overall Harbourvest share price should also rise.

At the moment, I’d also be buying at a discount to the net asset value. The net asset value reflects the price of all the investments owned by Harbourvest. At the moment, the share price is at a 23% discount to the NAV, based on figures from January.

The concern with this top growth stock is that private equity is inherently risky. Investing in young companies or even mature ones that are underperforming can lead to heavy losses if things don’t go to plan.

• Revenue and profits are still increasing compared with pre-pandemic results
• A higher forward P/E ratio may suggest the firm is overvalued
• Full-year revenue guidance is expected to be at the higher end of £270m to £285m

Having hit a high of 493p in June 2021, the Moonpig Group (LSE: MOON) share price is currently trading at a  52-week low of around 250p. As a card and gifts service operating in the UK and the Netherlands, this company only publicly listed in February 2021. It has performed well during the pandemic, but the FTSE 250 firm’s share price has fallen as pandemic restrictions have eased. Should I be looking to this business for a long-term investment? Let’s take a closer look. 

A FTSE 250 stock underpinned by strong results?

In results issued for the six months to 31 December 2021, Moonpig’s revenue was £142.6m. This had more than doubled when compared with the same period in 2019, demonstrating the company’s strong performance during the pandemic. A year-on-year comparison, however, shows that revenue declined by 8.5%. The profit figures display a similar trend. A two-year comparisons shows a rise from £9.4m to £18.7m. Year-on-year, however, profit plunged from £33m.

How do I account for this? It seems that the firm benefited from a massive increase in online shopping during the height of the pandemic. This would explain the high numbers for the 2020 figures. Although revenue and profits fell in 2021, this may simply be the company returning to a more ‘normal’ performance  rather than repeating the meteoric rise of a year earlier.

But I feel the company is in a strong position going forward. Moonpig’s ‘reminders database’, a metric by which we gauge its customer base, had grown to over 50m by the end of April 2021. Furthermore, the firm increased its revenue guidance for full-year results to the higher end of £270m-£285m. With a trading update due on 5 April, I will be watching very closely indeed.

Are the shares cheap?

A metric used to judge if a share price is over- or undervalued is the company’s price-to-earnings (P/E) ratio. Moonpig’s forward P/E, that uses estimated net earnings over the next year, stands at 23.7. On its own, this tells us very little. Compared to a major competitor, however, it may indicate that the shares are expensive.

Card Factory, another big player in the cards and gifts space, has a forward P/E ratio of 10.83. This may suggest Moonpig shares remain overvalued, despite falling to a 52-week low.  

On the other hand, investment bank Berenberg gave the firm a ‘buy’ rating in January and issued a target price of 430p. What’s more, independent non-executive director Niall Wass increased his own holding by 76% at the end of last month. This was at a price of 304p.

Moonpig, as a business, has performed well recently. But I won’t buy any of its shares at the moment. I want to wait for the next set of results to ensure the company is still going in the right direction. I won’t rule out a purchase in the future though.

My latest article on Moonpig was published only this Saturday. And in that, I had said that I would refrain from buying the stock right now. My sense was that it was way too pricey for me. Yet, cut to Monday, and it is rallying. What is going on here? And more importantly, was I wrong in deciding not  to buy it?

Why is the Moonpig stock rallying?

First, let us talk about why the FTSE 250 stock could be rallying. I reckon this is directly to the Omicron variant. From my own portfolio of FTSE 100 stocks, I can see the trend among gainers today. These include the likes of AstraZeneca, Ocado, and Rentokil Initial. All three are good defensives against a potential virus-induced market meltdown. 

For instance, AstraZeneca is the Covid-19 vaccine maker and healthcare stock, which is a good safe stock at anytime. The Ocado stock saw its most glorious times last year as we ordered groceries in during the pandemic, and Rentokil Initial, the pest controller and hygiene services provider, saw strong demand for the latter during Covid-19 as well. Similarly, Moonpig also saw a spurt in growth last year, as its bricks-and-mortar competitors were temporarily removed from the game. As virus fears rise again, it is little wonder that investors are betting on the stock again.

Robust fundamentals

Moreover, as I pointed out in my article, its performance is still pretty decent. It might have declined after the lockdown boom, but compared to 2019 it is strong. This could bode well for it in the future as well. This is especially since we are still quite hopeful of recovery next year, which is a good time for discretionary consumer spending.  

But even if the latest variant sends us back in to lockdown or makes us cautious about going out, I reckon that the Moonpig stock could stand to gain like it did last year. In other words, this is one stock that could be a winner either way. 

Should I have bought the FTSE 250 stock earlier?

So was I wrong in saying that I would not buy it?

The fact is, I still believe the stock is too pricey. In fact, the latest update price-to-earnings (P/E) number is 143 times. I think that is an eye-watering number, and I can think of multiple FTSE 100 stocks that could give me good returns at lower relative prices. Also, with rising inflation, I think consumers could cut back on discretionary purchases going forward. I maintain, that for now it is just too risky for me to buy the Moonpig stock.

Moonpig’s numbers ahead of pre-pandemic levels

On Thursday, the stock’s price increased by 4.5% after it released its results for the six months to 31 October, making it among the biggest FTSE 250 gainers. The numbers show that its performance has corrected from the lockdown spurt. Revenues are down by 8.5% and pre-tax profits have declined by 43% from the same time last year. So why is the stock still up? I reckon that is because it has still shown a significant jump from the pre-pandemic numbers of 2019. Revenues are up by 115% and reported profit before tax has doubled. Moonpig has also become more optimistic in its outlook. Revenue for the current year is expected to be “at the upper end of the previous guidance range”. 

What’s ahead for the FTSE 250 stock

I think these numbers are pretty impressive. The fact that it has been able to maintain an edge even after the easing of lockdown restrictions and the reopening of bricks-and-mortar retailers indicates some likely brand value to the company. The big question for me, as I plan my investments for 2022, is whether I should buy the Moonpig stock now.

There is no question that its fundamentals look good right now. And if recovery continues, it is not hard to envision more growth for the company. Times when economic growth picks up are normally quite good for consumer discretionary stocks. These stocks represent companies whose products are ‘nice to haves’ as opposed to say, grocery stocks, which represent companies that stock our ‘must have’ products. 

During years of growth pickup, discretionary companies see an outsized expansion in demand and vice versa. This could explain why Moonpig’s sales have stayed relatively strong even post-lockdown. If we add the fact that lockdowns have probably created a lasting structural shift towards online spending, Moonpig could potentially do quite well in the future.

The downside

But Moonpig is also a pricey stock. The company’s price-to-earnings (P/E) ratio is a huge 63 times. Frankly, I find that hard to justify. I can think of many examples of established FTSE 100 companies with lower P/Es that have seen consistent growth over the years. Why would I not rather buy those stocks instead? And I reckon other investors might think the same way. This may be why Moonpig’s share price has fallen some 25% from the highs of June this year. It is also down by 10% from its listing price earlier this year. 

My assessment 

Keeping everything in mind, Moonpig remains on my watchlist. I think there is a case for far more price correction here. I am happy to buy the £1,000 worth of the stock when its P/E reaches more reasonable levels, probably in 2022.