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Gear4music (Holdings) plc (LON:G4M), is not the largest company out there, but it led the AIM gainers with a relatively large price hike in the past couple of weeks. With many analysts covering the stock, we may expect any price-sensitive announcements have already been factored into the stock’s share price. But what if there is still an opportunity to buy? Let’s examine Gear4music (Holdings)’s valuation and outlook in more detail to determine if there’s still a bargain opportunity.
What is Gear4music (Holdings) worth?
The share price seems sensible at the moment according to my price multiple model, where I compare the company's price-to-earnings ratio to the industry average. I’ve used the price-to-earnings ratio in this instance because there’s not enough visibility to forecast its cash flows. The stock’s ratio of 21.81x is currently trading slightly above its industry peers’ ratio of 19.4x, which means if you buy Gear4music (Holdings) today, you’d be paying a relatively reasonable price for it. And if you believe that Gear4music (Holdings) should be trading at this level in the long run, then there should only be a fairly immaterial downside vs other industry peers. Furthermore, Gear4music (Holdings)’s share price also seems relatively stable compared to the rest of the market, as indicated by its low beta. This may mean it is less likely for the stock to fall lower from natural market volatility, which suggests less opportunities to buy moving forward.
What does the future of Gear4music (Holdings) look like?
Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. Although value investors would argue that it’s the intrinsic value relative to the price that matter the most, a more compelling investment thesis would be high growth potential at a cheap price. Though in the case of Gear4music (Holdings), it is expected to deliver a highly negative earnings growth in the upcoming, which doesn’t help build up its investment thesis. It appears that risk of future uncertainty is high, at least in the near term.
What this means for you:
Are you a shareholder? G4M seems priced close to industry peers right now, but given the uncertainty from negative returns in the future, this could be the right time to de-risk your portfolio. Is your current exposure to the stock beneficial for your total portfolio? And is the opportunity cost of holding a negative-outlook stock too high? Before you make a decision on G4M, take a look at whether its fundamentals have changed.
Are you a potential investor? If you’ve been keeping tabs on G4M for a while, now may not be the most optimal time to buy, given it is trading around industry price multiples. This means there’s less benefit from mispricing. In addition to this, the negative growth outlook increases the risk of holding the stock. However, there are also other important factors we haven’t considered today, which can help crystallize your views on G4M should the price fluctuate below the industry PE ratio.
If you want to dive deeper into Gear4music (Holdings), you'd also look into what risks it is currently facing. Case in point: We've spotted 3 warning signs for Gear4music (Holdings) you should be mindful of and 1 of them is concerning.
If you are no longer interested in Gear4music (Holdings), you can use our free platform to see our list of over 50 other stocks with a high growth potential.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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