I’ve always had a soft spot for online musical instrument and equipment retailer and growth stock Gear4music (LSE: G4M). Unfortunately, today’s interim results from the small-cap have been poorly received by the market and the share price tanked 20% as trading commenced. What’s got investors so spooked?
Bum note
Revenue over the six months to the end of September came in at £64.7m. This was down 8% on the same period in 2020. However, one must remember that G4M benefited hugely from multiple UK lockdowns over that time. As such, beating that haul would always be a challenge. Earnings before interest, tax, depreciation and amortisation (EBITDA) also fell 43% to £4.8m.
On a more positive note, revenue and EBITDA were still 31% and 140% higher respectively than in the same six months in 2019. For me, this is a better gauge of how far the company has come.
Here’s where things get more problematic. While the dip in sales was inevitable, investors didn’t like the news that revenue over G4M’s third quarter to date has been “slower than expected due to ongoing Brexit supply chain challenges“. Sales in Europe had also been slower than predicted.
This loss of momentum has forced CEO Andrew Wass and co to revise their guidance for the full financial year. EBITDA of “not less than £12m” is now expected — 36% lower than last year. It’s also lower than the £14m projected by analysts.
All this doesn’t look great, especially as the company only upgraded its forecasts back in June following a storming Q1. Nevertheless, G4M does expect the aforementioned challenges to be sorted out by the final quarter as its new distribution hubs in Ireland and Spain get up to speed.
Clearly, a successful pre-Christmas trading period is vital if the shares aren’t to fall further. However, I’m inclined to think that today’s fall is simply a bum note. The unstoppable rise of online shopping, even for very specific items like instruments, should allow G4M to continue grabbing market share. The proposed move into the audio-video space via the acquisition of AV Distribution Ltd is also a sensible move and should help to diversify earnings.
There’s still much to like about this growth stock and I’d be willing to buy at this level.
On song
G4M is not the only music-related growth stock out there. Another company — audio products supplier Focusrite (LSE: TUNE) — also reported to the market this morning.
In sharp contrast to G4M, TUNE reported a 34% jump in revenue to just under £174m. Adjusted EBITDA also soared 67% higher to £47.5m as musicians and podcasters snapped up Focurite’s products “in record numbers” over lockdowns.
There could be more good news to come. As live events return, CEO Tim Carroll said that demand had “remained strong” into the new financial year. Product launches also make him “cautiously optimistic” on achieving “modest revenue growth“. However, operating costs are expected to rise, partly in light of supply chain pressures.
Of the two growth stocks mentioned, I’d probably snap up G4M over TUNE. I’ve always felt that the latter’s valuation was getting ahead of itself. Even before today’s 8% rise, the stock was trading on 39 times forecast earnings. As good a company as this is, that’s very rich.
For me, G4M probably offers a better margin of safety.
Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Focusrite and Gear4music. 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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