Can investors afford to ignore this trend?

Paul Summers — Tue, 23 Aug 2016 09:09:26 +0000

Here’s a statistic for you. Online sales are up 16.7% year-on-year according to the Office for National Statistics. That’s a serious shift in spending behaviour. As such, it may be worth investors asking whether their portfolios should have some exposure to companies that generate a vast proportion (if not all) of their earnings online. Let’s look at three examples.

Why so serious?

One beneficiary of this trend has been pure-play clothing retailer Boohoo.Com (LSE: BOO). Its shares have doubled in value from the start of the year. This significant rise means the company now has a market cap of just under £1bn – quite a turnaround for a stock that was jettisoned from many investors’ portfolios back in January 2015 following a shock profit warning.

While share prices never move in a straight line, I’d be surprised if Boohoo’s failed to rise further, especially as a recent trading update made reference to the the board anticipating interim results (due at the end of September) to be “above expectations” following robust demand and sales momentum in the first quarter.

While trading on what appears to be a sky-high forecast price-to-earnings (P/E) ratio of 55, this is still less than than the P/E of its biggest online competitor, ASOS (LSE: ASC) at 63. At roughly a quarter of the latter’s size, I’d argue that Boohoo offers more upside potential.

Gearing up for growth?

With a market cap of just £33m, York-based Gear4music (LSE: G4M) might seem small but it’s already the largest UK-based online retailer of musical instruments and equipment. A favourable trading statement released at the end of July would suggest a bright future ahead. UK sales were up 44% to just over £9m compared to the same four-month period in 2015. Sales growth in Europe was even stronger, jumping 137%. Taken together, Gear4music managed to increase total like-for-like sales by 66%.

The company plans to open its first European Distribution centre before the end of 2016, allowing it to reduce both delivery timescales and costs and thereby offer the same level of service that its UK customers enjoy. July’s update also made reference to the company being “well positioned to take advantage of the short-term export opportunities created by the UK’s EU Referendum vote“.

Gear4music operates in a fragmented market, ripe for consolidation (even if management says that this isn’t the immediate priority). Factor-in its impressive, user-friendly website, bespoke e-commerce platform, large product range and excellent customer feedback and the investment case for Gear4music looks pretty compelling.

Stay for the dividends?

Hostel-focused online booking platform, Hostelworld (LSE: HSW) is another option with the company announcing its interim results earlier this morning. Booking growth was up 16% with 45% of this coming from mobile devices. The company also reported decent growth in emerging markets with bookings to Asian destinations up 30%.

Initial indications suggest that the market is extremely pleased with these figures and the board’s statement that expectations for the full year remain unchanged (despite challenging market conditions following Brexit and recent terrorist attacks). Hostelworld’s share price is up almost 9% this morning.

In addition to its market leading status and the possibility of future growth, Hostelworld’s massively cash-generative business model means it’s able to pay large dividends to shareholders. A yield of around 7%, covered 1.3 times by earnings is certainly appealing in this low-rate world.

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Paul Summers owns shares in boohoo.com and Gear4music. The Motley Fool UK has recommended boohoo.com. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Is It Time To Pile Into Blinkx plc And ASOS plc?

Kevin Godbold — Fri, 07 Aug 2015 12:53:32 +0000

The story at internet media platform provider Blinkx (LSE: BLNX) is of a once-profitable advertising firm that found its business model stopped working.

Profits became losses, the share price plunged, and the firm engaged in developing a new approach to its business that it hoped would restore profitability.

The good news is that there are signs that the new business model is starting to work.

A new direction

The chief executive reckons Blinkx realigned its business to focus on mobile, video and programmatic advertising channels, to follow an industry moving in that direction. Blinkx enables advertising on the internet, which gets to consumers as video content and the like via the devices we use such as laptops, tablets and smart phones.

Blinkx just emerged from a year where the industry and the company went through a significant structural shift. Yet the top director says organic investments and strategic acquisitions are helping the firm realign its strategy and operations with emerging market trends, which he hopes will restore the firm’s profits in the long run.

Green shoots

The recent full-year results saw mobile revenues almost triple year-on-year, which the firm says combined with desktop video and programmatic revenues to constitute the majority of firm’s turnover, suggesting good progress with the company’s new strategy.

There are signs that cash flow and profits could be trailing behind, yes, but with potential to catch up with revenue generation. Blinkx quotes an earnings take before interest, tax, depreciation and amortisation (EBITDA) of $3.5 million and a $5 million result for cash from operations. Admittedly, some wags describe EBITDA as earnings before deducting the nasty bits, but a positive result could presage post-tax earnings down the road.

Although Blinkx remains speculative, news on the firm’s great investing advantage — balance sheet strength — is good. Even after acquisitions, there’s still a cash pile of around 15p per share and the company remains debt free.

Growing nicely

The story at online fashion retailer ASOS (LSE: ASC) is different. The firm’s vision to be the world’s number one online fashion destination for the twenty-somethings has seen it chalk up some impressive earnings growth figures since starting out about 15 years ago.

The tricky part of the equation for would-be investors is the current valuation, not the firm’s performance, which has been phenomenal. At a share price of 3365p, the forward price-to-earnings multiple sits around 61 for 2016, so we need to be very sure of the firm’s potential to carry on growing before taking the plunge with an investment in ASOS.

That said, the share price has been weak lately and the growth figures keep on coming. For the four months to 30 June, the company reckons retail sales grew 20% with international sales around 59% of the total. There was also a 280 basis points improvement in the retail gross margin. Business remains robust and, like Blinkx, ASOS has a strong balance sheet with net cash and no debt.

The chief executive thinks sales for the full year will be at the higher end of a 15-20% growth range, suggesting the ASOS growth story remains firmly on track.

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