Until the end of 2021, YouGov (LSE: YOU) had been a growth stock that was performing well. Fast progress in earnings from the online research data and analytics company made the shares take off in the middle of 2015. By Christmas 2021, the price had gone up by more than 1,300%.
However, the stock topped-out — as these well-known growth stories often do. Valuations can’t keep increasing forever, and nosebleed multiples often correct in the end because investors take profits.
What really torpedoed the share price though, was June’s update on trading.
A dip in profits
The firm said sales bookings were lower than anticipated. Full-year adjusted operating profits to the end of July will likely come in well down from forecasts.
Shareholders didn’t hang around to ask questions. Instead, many simply pulled the ejector seat handle and sold up. The outcome was a crash of almost 50% for the already-weakened share price.
However, it wasn’t all bad news in that fateful update. The company said it had seen increased demand for customised search solutions. On top of that, the consumer panels business was performing well.
But despite those positives, sales in the data products division were slow and there had been declines in fast-turnaround research services. On top of that, the company said it had experienced “challenges” in the Europe, Middle East, and Africa regions.
Looking ahead, the directors said they will focus on optimising the cost base and prioritising investment in “key” growth areas for the coming trading year. The intention is to upgrade the company’s data products, build on its artificial intelligence (AI) capabilities, and enhance the sales organisation.
A strong earnings rebound ahead?
City analysts are optimistic about the potential for recovery and have pencilled in 48% surge in normalised earnings for the trading year to July 2025. If that happens, earnings will be at a new high. So have we merely seen a temporary setback in YouGov’s growth trajectory?
If we have, the fallen stock price may be a value opportunity and a chance to pick up shares in a former growth darling at a knock-down price.
However, there are risks. We’re not used to seeing earnings plunge like they have. So has the spell been broken?
YouGov just demonstrated its ability to disappoint and may never again attract the rich levels of valuation it once did. On top of that, if earnings can plunge in one year, why not in another ahead? Can we trust YouGov to grow consistently in the future like it has in the past?
Because of these uncertainties, YouGov’s valuation looks cheaper now than for years. With the share price near 458p, the forward-looking price-to-earnings ratio for next year is around 12.
Despite the risks of the business going ex-growth and other unknowns, I reckon it’s a good time to conduct deeper research into YouGov now. If the company can keep hold of its mojo, it may prove to be one of the best-value growth stocks around.
