With this UK tech share price in pennies, is it doomed?

Christopher Ruane has been watching the S4 Capital share price tumble while deciding whether to sell or hold. What should he do now?

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One of the businesses I have been most excited about in recent years is digital marketing agency group S4 Capital (LSE: SFOR). So I have been bitterly disappointed by the performance of the the UK tech share’s price over the past year and a half or so.

S4 shares began last year trading at over £6 apiece. They have since tumbled to today’s sorry state of under a pound each.

Reasons for the fall

I think there are multiple reasons for the fall. I believe understanding them can help me form an opinion on where the S4 Capital share price might go from here.

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First is erosion of confidence in management. Results publication being delayed several times last year badly hurt the City’s confidence in the company and I think it will take years to recover from that.

Since then, yet more bad news and the way it is communicated has further hurt S4’s credibility. Last month’s profit warning was an example.

Secondly, the business valuation has been damaged by association. Its main customer base consists of large tech firms. Turbulent tech valuations have carried over to how some investors value a UK tech share like S4 Capital.

Thirdly, and perhaps most importantly in the long run, have been questions about how viable the business model is.

The business has been growing revenues quickly, topping £1bn last year. Its current market capitalisation is barely more than half of that.

But its losses have also mounted, with the post-tax loss reaching £160m last year. Fast growth and scalability are attractive because they can boost profits. So far at S4, they have not been doing that.

What next?

The reason I think the third reason is the key consideration is because the first two are ultimately about sentiment. Business performance is about facts.

As Warren Buffett says: “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

In other words, if the business does well in the long run, I think the S4 Capital share price will rise to reflect that. If, on the other hand, losses keep growing and the ultimate profitability of the business model comes into question, I think S4 Capital shares could fall a long way even from their current enfeebled levels.

I’m holding

While directors continue to own a significant proportion of the company, the lack of any director buying even when the S4 Capital share price is in pennies makes me wonder how confident the board members are about the outlook for the firm.

That alone is enough to put me off buying any more S4 shares for my portfolio.

Although I recognise substantial risks, I do also think S4 could yet turn out to be one of the leading UK-based marketing agency networks. If it can keep growing revenues but bring costs under control, the business could be profitable.

Once payments to the founders of businesses it took over are all paid in the next year or so, the bottom line should start to look much healthier. So I plan to hold my shares.

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Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

C Ruane has positions in S4 Capital Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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