Small stocks can be a great way for investors to earn multibagger returns (doubling, tripling, or more) on their investments. And while a company's stock price doesn't necessarily reflect its market cap, the two numbers often correlate.
Membership Collective Group (SHCO 3.38%) fits the bill. Let's discuss why this $7.40 stock (as of this writing) probably won't stay cheap forever.
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What is Membership Collective Group?
Founded in 1995 and public since 2021, Membership Collective Group is an exclusive luxury hospitality company with a compelling business model.
Soho House, its flagship asset, is a private membership club that draws most of its members from creative industries like media, arts, and fashion. It also offers adjacent services like its co-working space, Soho Works, and Soho Home, a furniture store inspired by the brand's aesthetic.
Luxury goods and services providers can build extraordinarily strong economic moats because they tap deeply into the human psyche -- appealing to things like the need for status, the desire to feel special, or to belong with a particular group.
Soho also enjoys a network effect, because the more people interact with the clubs, the more valuable they become. Social relationships between members can lead to increased customer stickiness and growth through word-of-mouth referrals.
Business is booming
Membership Collective's fourth-quarter earnings were a slam-dunk success. Total revenue jumped 46.5% year over year to $270.4 million, helped by a similar percentage increase in the number of members to 226,830. And while the company must tread a fine line between growth and exclusivity, it seems to be managing this well.
Instead of crowding all its properties into one city, it has embarked on a geographic expansion that involved opening properties in Stockholm, Sweden, and Bangkok, Thailand, last year. The magic here is that its social clubs also serve as boutique hotels, giving its members even more value out of their membership fee (which ranges from roughly $2,000 to $4,000, depending on the city). Soho House boasts a wait list of 86,000 prospective members, while retention rates stand at 93.4%.
A good valuation and pathway to profitability
While Membership Collective's top line is firing on all cylinders, the bottom line is also exciting. No longer an unprofitable growth stock, management expects to generate adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $120 million to $130 million in 2023 -- more than double what it earned in 2022. Analysts at Roth Capital also believe the company's wealthy client base and stickiness could leave room for price increases to boost margins on top of organic growth.
At its recent stock price of $7.40, Membership Collective's $1.24 billion market cap puts it in the small-cap territory. It is also cheap on a valuation basis, with a price-to-sales (P/S) multiple of just 1.42 -- compared to the S&P 500 average of 2.33.
This is an incredible discount for such a fast-growing company with a clear pathway to sustainable profits. And the stock is one of the highest-conviction buys I've seen in years.
