Why this FTSE AIM stock crashed 20% today

Key points

• This company has warned on profits less than a year after its IPO

• Management lost £800k of orders before Christmas

• But there’s cash in the bank and the business remains profitable

A profit warning has caused FTSE AIM stock Virgin Wines (LSE: VINO) to crash more than 20% today. Management has warned investors that profits for the current year will be lower than expected, due to a slowdown in new customer sign-ups.

This home delivery wine retailer only floated on London’s AIM market in March last year. Growth was strong during the pandemic, but Virgin Wines’ share price is now 30% below the IPO price.

Existing shareholders are suffering a nasty hangover, but I’m wondering if today’s drop could be a buying opportunity for my portfolio.

Still trading well?

Today’s trading update covers Virgin Wines’ performance during the six months to 31 December. Management says total sales of £40.5m were unchanged from the same period in 2020, but were 55% higher than in 2019.

These numbers tell me that the growth seen during the first year of the pandemic — when many more people were at home — has now levelled out.

Although Virgin Wines is continuing to add new customers, the company says new sign-ups have slowed. This is blamed on a weaker response to marketing offers, especially “paper-based activity”.

My feeling is that a slowdown in growth is inevitable, given that pubs and restaurants are now open again. I’d guess that existing customers may be ordering less too.

Poised for a return to growth?

In fairness, staffing shortages and freight problems added to the company’s pain in December. Virgin Wines was forced to stop taking Christmas orders two days earlier than planned in order to make sure they were delivered. The impact was painful — CEO Jay Wright says the company lost £800,000 in sales.

My sums suggest Virgin Wines’ profits are now likely to be flat, at best, this year. In reality, I think profits are likely to fall.

However, the business still holds net cash of £13.6m and should continue to benefit from its well-known brand. In addition, broker forecasts suggest the 2022/23 financial year could be much stronger, with earnings rising by more than 20%.

Story continues

If these numbers are correct, I think this stock could offer value after today’s crash. Unfortunately, I don’t feel very confident about such forecasts at this stage. I suspect City analysts may cut their earnings estimates for the firm after today’s news.

Should I buy this FTSE AIM stock?

Does Virgin Wines have much to differentiate it from other online wine sellers? I’m not convinced. In my view, last year’s flotation was well timed, given the strong growth during lockdown. I think further expansion will be tougher.

Even after today’s drop, I estimate that Virgin Wines could still be trading on 18 times forecast earnings. That seems quite high to me, given the uncertain outlook.

I’m also concerned there could be more bad news to come. According to an old stock market adage, profit warnings come in threes. I’ve often found this to be true.

Unless I see a strong recovery in profitable growth, I’d only consider buying Virgin Wines at a rock-bottom valuation. In my opinion, we’re not there yet.

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Roland Head has no position in any of the shares mentioned. The Fintech Zoom UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Fintech Zoom we believe that considering a diverse range of insights makes us better investors.

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