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Is the Surfstitch Group Ltd share price overvalued?

Surfstitch Group Ltd (ASX: SRF) is a new-age retailer and aspiring digital powerhouse. Founded on Sydney’s northern beaches by Lex Pedersen and Justin Cameron, Surfstitch started life as a clothing retailer, but thanks to strong growth and a string of acquisitions it is now leading the charge as a global online action sports platform.

Following a successful initial public offering (IPO) a year ago, Surfstitch is now worth more than Billabong International Limited (ASX: BBG) – the company which bought a stake in Surfstitch to fund its growth back in 2009.

There’s a lot to like about Surfstitch, including gross profit margins of 38% and no debt. Operating under popular names such as Surfstitch, Swell, Surfdome, STAB and Magicseaweed; the company prides itself on customer satisfaction.

The focus on the end user is being reflected in enviable amounts of repeat visitation and rapidly growing revenue. Globally diversified, less than one-third of users come from the Asia Pacific region. And unlike many large bricks-and-mortar cum digital retailers, Surfstitch offers next day delivery in over 130 countries and access to 600 brands. Best of all, Surfstitch is forecasting profit growth for the year ahead.

Is Surfstitch a buy or a sell?

Prudent investors should be conscious of the risks when a company chooses to grow by acquisition. However, although its far too early to know for sure whether or not Surfstitch’s most recent capital allocation was a savvy financial decision, the takeover targets appear well within management’s competencies. Moreover, Surfstitch has a very strong retail business that is growing organically. This business should support revenue growth for the foreseeable future.

Is it overvalued?

According to Morningstar, Surfstitch shares trade at a price-earnings ratio of 45x next year’s profits per share. While that appears high on first glance, Surfstitch is forecast to grow rapidly. According to the average price targets of the three analysts surveyed by The Wall Street Journal, Surfstitch shares are worth $2.21 – they currently trade at around $1.94.

However, while analyst price targets can be insightful, it’s an inherently difficult and an intensely subjective exercise to put a price target on growth stocks like Surfstitch. Nonetheless, I think it’d take a brave investor to beat against Surfstitch over the long-term. In my opinion, it’s at least worthy of a spot on your watchlist.

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Motley Fool contributor Owen Raszkiewicz has no position in any stocks mentioned.

Owen welcomes your feedback on Google plus (see below), LinkedIn or you can follow him on Twitter @ASXinvest.

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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