Watch out below! The Catapult Group International Ltd (ASX: CAT) share price has fallen around 21% in just four days.
What's going on with the Catapult share price?
Shares in the $430 million sports analytics business began to fall following an announcement by the company on December 1 that detailed a business update.
Specifically, the company released revenue guidance for its 2017 financial year for between 21% and 30% growth over last year. The guidance includes the proportional contribution from the company's two recent acquisitions: XOS Technologies, a digital and video analytics specialist for sporting teams; and PLAYERTEK, a leading developer of wearable analytic devices for the 'prosumer' market.
Is it good value?
Its often helpful to 'zoom out' of the recent share price action to get a sense of the bigger picture. As can be seen above, Catapult shares have hit it for six with its price up 390% in two years.
As a sporty (pardon the pun) tech analytics business, it is easy to see the appeal of holding shares in this small cap company. Indeed, Catapult is selling its top-of-the-range wearable sports analytics devices to high profile teams across the globe. What's more, the market is believed to be massively underserved.
However, prudent investors must be careful. Because when a small company gets on a role with good news, the market can quickly 'rerate' or 'reprice' the stock upwards — lessening the upside potential.
Moreover, when you are dealing with a rapid growth company such as Catapult, traditional valuation techniques can become very sensitive to inputs and ultimately less 'valuable' in their own right. Often, top line growth, or revenue, is of utmost importance in these situations because it is essentially a land grab where the first players on the pitch are most likely to win.
Buy, hold or sell?
In my opinion, the market is likely to have been spooked by the lack of exponential revenue growth, but that is understandable. It is vital that investors remain on their toes with a company like Catapult, given the fast pace at which its market is moving.
Indeed, when a $430 million tech company has just issued $100 million of stock (mostly to institutions!) to fund acquisitions, shareholders should demand healthy top line growth. However, it is also important to determine if this 'slowdown' in revenue is temporary in nature because if it is it could be a great time to purchase the stock.
Morgans analysts recently raised their price target on Catapult shares to $4.32, according to Dow Jones Newswires. That would make it very good value today.
Whilst you should take analysts' price targets with a pinch of salt, I'm beginning to come round. I believe Catapult shares are nearing a compelling valuation and if they fall much further, they could be a top investment coming into the new year.
