Most people like to air their opinions. But with TV and radio, magazines and newspapers already swamping their audiences on every subject from “Who will win the next general election” to “Will Kate Middleton marry Price William?”, do we really need another polling body in this already crowded space? According to this market research company, the answer is yes. Paul Hill is not so sure…
Turkey of the week: YouGov (YOU), rated a BUY by The Daily Telegraph
YouGov was founded in 2000. It specialises in online political polling and market research and listed on Aim at 27p a share in April 2005. Last week it reported full-year results that met City hopes. Profit before tax and goodwill for the 12 months ended July jumped 39% to £5.7m on turnover up 51% to £14.3m.
Over the past year, the group has launched three new polls covering specialist sectors, global opinion leaders and fund managers. Yes, online research is undoubtedly a growth area, but barriers to entry are low and industry giants such as Mori, Taylor Nelson Sofres (TSN) and ICM are already well established. While all this new analysis is interesting, is it really a long-term trend or just a short-term fad? To me, many of the newer polls are simply irrelevant and won’t stand the test of time. Over the past year, YouGov has also grown globally through acquisitions in America, the Middle East, Germany and Scandinavia. It raised £27m through a placing at 140p in August, spending e20.75m on Psychonomics of Germany, and also bought a 68% stake in America’s Polimetrix for $24.1m.
To my mind, this is high-risk stuff; these are not small deals, but transformational acquisitions that have nearly trebled the size of the company overnight. Group revenues are expected to be around £40m this year. These acquisitions do open up substantial new markets: $7.7bn in the US, $2.4bn in the UK and $2.2bn in Germany. However, integrating these businesses will be major challenge and I wonder whether the board has bitten off more than it can chew.
Moreover, Psychonomics specialises in offline, rather than online market research, a worrying digression from the group’s online-only roots. Just to add to the complexity, YouGov revealed plans last week for the global expansion of its Polimetrix service (currently only available in the UK) into new countries such as Russia, China and India. This is going to be another major drain on resources. Keeping all those balls in the air as the economy slows is likely to prove extremely difficult.
In fact, I’d be amazed if management pulls it off and still hits the City’s 7.4p earnings per share target for 2007/2008. Yes, it’s possible – but it’s not probable. And even if an earnings miss is only marginal, then be prepared to see the shares marked down aggressively. Just look at what happened to one of YouGov’s competitors, Research Now, after disappointing in July. Its stock tanked by more than 40% in a single day.
Given the significant challenges ahead and the racy valuation of over 22-times earnings, I would sell the shares. If you need any further reasons, consider that there is also an outside chance that in the medium term the likes of Tesco – or any other company with vast quantities of consumer data – might also decide to muscle in on this lucrative market.
Recommendation: SELL at 189p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments