The FTSE 250 is filled with shares that have so much potential to become the giants of the future. After all, many FTSE 100 shares started their journeys in the smaller mid-cap index.
Shares in smaller companies have the potential to deliver extraordinary returns. Veteren UK investor Jim Slater even had a well-known saying for it: “elephants don’t gallop”.
One FTSE 250 share that I reckon is on the verge of soaring is online greeting card business Moonpig (LSE: MOON). It first listed its shares in 2021, amid an online boom during the pandemic. The company was valued at £1.2bn at the time of its listing but is now almost half. I taste an opportunity.
A FTSE 250 share ready to soar?
I reckon Moonpig shares are now ready for a turnaround. Pretax profit rose 33% to £46.4m in the year ending 30 April. The company has been investing in new AI technologies to deliver personalised experiences to its customers.
These features are often innovative and not feasible with high street card shops. And using technology like this could keep existing customers and attract new ones too.
For instance, Moonpig now allows customers to attach voice and video recordings to some of their cards in the form of QR codes.
The Moonpig Plus subscription has exceeded the company’s expectations and passed 500,000 members within a year. For £9.99 a year, members are given a range of benefits including 30% off the cost of birthday cards and other multi-purchase offers.
Such a model does two things. First, it creates a reoccurring revenue stream, providing reliable cashflow for the business. Second, it influences members to continue shopping with Moonpig as they receive a discount by doing so.
I reckon this subscription model could continue to grow over the coming years.
Quality at a reasonable price
This FTSE 250 share offers decent quality metrics at a reasonable price. For instance, it has a return on capital employed of 45% and a profit margin of 19%.
Given the drop in share price over the past few years, it now trades at a price-to-earnings ratio of just 14, which strikes me as good value given a steady growth in profits.
No more debt please
Bear in mind that it doesn’t have the strongest balance sheet I’ve seen. My favourite businesses have net cash to be able to withstand economic and business shocks. Moonpig does not. That said, it has been able to reduce a chunk of debt over the past year. And given its cash generation, its debt looks manageable.
It’s something that I’d monitor, though. I’d be less positive if the company decided to take on more debt.
Also, note there are cheaper alternatives to its cards and gifts. Any downturn in customers’ finances could shift them to competitors.
Overall though, I’d say the pros outweigh the cons for me. I wasn’t keen on this share when it first listed as I felt it was too expensive and its sales bump was temporary during the pandemic. But now, it trades at a much more reasonable valuation. It’s now one of my favourite FTSE 250 shares.
This post was originally published on Motley Fool
