For a while, shares in S4 Capital (LSE: SFOR) were headed to the sky. Less than a year ago, the share price was north of £8. But the company has performed horribly so far in 2022.
At the time of writing this on Thursday morning, the shares have tumbled 42% since the market opened after the digital ad agency network issued a profit warning. They are now 81% lower than they were a year ago.
As a long-term bull on the company’s prospects and S4 shareholder, could this be a great buying opportunity for me as a long-term investor? Or should I throw in the towel?
More bad news
The profit warning comes after the company reviewed its figures for the first half of the year. From a revenue perspective, things continue to look good. The business still expects full-year like-for-like revenue growth of 25%. Many companies would love that level of expansion.
But the earnings picture is much less rosy. S4 lowered its guidance for full-year earnings, before interest, tax, depreciation and amortisation (EBITDA), to around £120m. That is roughly 23-27% lower than analysts’ expectations. The company did not guide on basic earnings, which I regard as a more concrete metric than EBITDA.
Behind the pared-down expectations are spiralling costs. The company specifically mentioned staff and hiring costs in its Content division. S4 has now initiated what it called “a brake on hiring” as well as tightening cost controls.
Repeated disappointment
If this was the first bad news this year, the S4 Capital share price may not have plunged as much as it did this morning. But it already damaged its reputation badly with the fiasco of postponing its annual results and then delaying them once more the afternoon before the rescheduled due date.
At that point the company specifically mentioned a plan to tighten controls in its Content practice as well as more generally. The Content division accounts for around two thirds of S4’s business so it no surprise that problems may arise sooner here than in smaller divisions. But today’s profit warning concerns me as I am starting to question how tightly the Content division is being run.
S4 has grown at breakneck speed, largely through acquisitions. That model worked for chairman Sir Martin Sorrell at WPP but it appears to be making S4 a tough business to manage. On top of that, the management team’s credibility is now very damaged, in my view. That could scare many investors away.
My move on the S4 Capital share price
For now, I will hang onto my S4 shares as I still believe in the long-term story. The revenue growth remains strong. If the ultimate potential of the company is fulfilled, today’s price could come to be seen as a real bargain a few years from now.
However, things could also just go from bad to worse. Despite S4’s potential, increasingly I do not like the reality. It may take years for the company to rebuild its reputation. The viability of its business model is also increasingly difficult to measure. For now, at least, I will not be buying any more shares.
