While a company's stock price doesn't directly reflect its market cap (the value of all shares in existence), cheaper stocks tend to represent smaller companies. These are ideal for investors who want to get in on the ground floor of a long-term opportunity. Let's explore why Soho House (SHCO -1.42%) fits the bill and could make an excellent buy in September and beyond.
Why Soho House?
Soho House operates a global network of private membership clubs -- organizations that provide social facilities and hospitality services to members who pay a fee for access. Since its founding in London in 1995, the company has established itself as a status symbol for people in the creative industry, who typically use its properties for networking and entertainment in some of the world's most prime locations.
To add to its prestige, Soho properties tend to be located in large global cities like London, New York, and Los Angeles. They also attract a high-end crowd, with the U.K.'s Prince Harry reportedly meeting his now wife, Meghan Markle, at its Dean Street location. But the club isn't easy to join, even for celebrities. The well-known socialite Kim Kardashian was turned down several times, for example.
The combination of exclusivity and luxury gives Soho House a deep economic moat, which is a long-term advantage that can help power growth and protect its market share from potential competition. So far, the company's strategy seems to be working.
Operational results are impressive
Soho House's second-quarter earnings show healthy business momentum. Revenue increased by 18.5% year over year to $288.9 million on a 28% jump in paying members to 248,071. The company earns revenue based on membership fees (roughly $2,000 to $3,000 per year in the U.S.) and in-house revenue, which refers to food, drink, and accommodation purchased at its locations.
Image source: Getty Images.
Soho's expansion roadmap is straightforward because of the pent-up demand created by its exclusivity and desirable real estate. With a waitlist of 95,000 people, the company can essentially grow membership levels at will -- the only constraint being the need to maintain exclusivity at its existing properties. To overcome this challenge, the company is expanding internationally with plans to open locations in Mexico City and Sao Paulo, Brazil, by the end of 2023.
Soho House is also on the verge of consistent profitability, with its net loss narrowing from $83.6 million to just $2.2 million year over year in the second quarter. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) roughly doubled to $31.8 million (this figure also adds back foreign exchange losses and stock-based compensation).
The valuation is still spectacular
While Soho House isn't yet consistently profitable according to generally accepted accounting principles (GAAP), the company's valuation is shockingly low for a fast-growing company with improving margins. With a price-to-sales (P/S) multiple of just 1.4, shares trade for just a fraction of the S&P 500 average of 2.5, so it's not too late for investors to bet on this unique hospitality company at a rock-bottom price tag.