Despite announcing that it expected top line revenue growth for the December 2019 half year of 24% against the prior corresponding period, shares in Jumbo Interactive Limited (ASX: JIN) tanked on Friday.
The online lottery business' share price ended the day 14.5% lower at $15.74, capping off a pretty torrid couple of months for shareholders. The slide has continued today, with Jumbo shares dropping another 5.4% in morning trade. Since hitting a new 52-week high of $27.92 in mid-October the share price has plummeted more than 45%, erasing a substantial amount of the gains made this year.
The bloodletting started back in late October. It may have caught many shareholders by surprise, considering that the company had released few announcements to the market around this time. And the updates it had released had been almost resoundingly positive. In his AGM address on 24 October, CEO Mike Veverka spoke about the solid start Jumbo had made to FY20, the improved performance of the Jumbo online platform, and the company's optimistic plan to grow the total transaction volume processed through its platform to $1 billion by FY22 (it was $321 million in FY19).
And yet, the share price kept falling. In the week following the AGM, Jumbo shares slid around 20% lower. Even the mid-November announcement that Jumbo was entering the UK market through the acquisition of lottery manager Gatherwell Limited did little to reinvigorate the company's share price.
As the darling of their share portfolios crashed lower, long-term shareholders were left scratching their heads. What was causing the decline? Short-term opportunists taking profits off the table? Maybe algorithmic traders triggered by some far-off change in the macro environment?
In truth, it was probably more likely that the Jumbo share price had accelerated too fast for its own good. At its peak share price in October, Jumbo was trading at more than 60 times its FY19 earnings. This is quite high compared to its peers in the gambling industry. Gaming machine manufacturer Aristocrat Leisure Limited (ASX: ALL) only trades at a little over 30 times its FY19 earnings, and Tabcorp Holdings Limited (ASX: TAH) trades at closer to 25 times FY19 earnings. So the Jumbo share price was probably due for a correction sooner or later.
However, Friday's steep drop was more likely driven by the company's trading update. Although the top line revenue growth forecast was still healthy, NPAT was only forecast the come in 13% higher at $14.3 million. These shrinking profit margins sent a negative sign to investors, who promptly dumped the stock.
But the market may have reacted a little harshly to the news. It's worth noting that one-off professional fees relating to the acquisition of Gatherwell were included in those results, as was increased business spending on future growth opportunities. The company expects at least the underlying EBITDA margin to return to its previous higher levels in FY21.
Foolish takeaway
Personally, I think that the market has punished Jumbo unduly. As a growth investor, it's great to see a company investing for the future and expanding internationally. This sort of strategy obviously brings with it a healthy share of risk: risk that growth projects won't come off, or forays into other international markets won't pan out as they have back at home.
But Jumbo has shown it can succeed and consistently grow its revenues. If you believe the ability of company management, now might be a great time to pick up Jumbo shares at a cheap price – they may not remain this low for long.
