Why Zoo Digital shares just halved in value

This former 10-bagger AIM share crashed to earth with a bump, but analysts expect a big recovery in time.

Zoo Digital Group (LSE:ZOO) the AIM 10-bagger whose subtitling services have boomed on the back of explosive growth in digital streaming offered by the likes of Amazon, has rewound its share price by a year following a profits warning today.

The Sheffield-based company, which enables TV and movie content to be subtitled and dubbed in any language, lost nearly half its market value as it revealed its performance had been hit by the loss of a single, material project.

In addition, revenues from processing legacy DVD and Blu-ray titles will be significantly lower than anticipated as the market decline in this area has accelerated more quickly than envisaged.

Shares, which surged by more than 1,000% in the period between 2017 and 2018, peaked at 176p last July only to slip back to 100p at the start of this year. They traded as low as 58p Tuesday after chief executive and 15% shareholder Stuart Green said revenues will be about 10% below full-year expectations.

He remains confident, however, that there's nothing wrong with the strategy that has rewarded shareholders so handsomely in recent times. 

Source: TradingView (*) Past performance is not a guide to future performance

Green points out that the downgrade is primarily due to one-off factors and that the company continues to deliver year-on-year growth across its key services lines in dubbing and subtitling.

He said:

"We are now enjoying a growth in orders from our largest clients and expect to add significant new accounts during the remainder of the second half."

Green's "excitement for the future" is backed by analysts at finnCap after the house broker's target price was left unchanged at 180p today.

They said:

"The market will require proof of greater growth momentum and new client win newsflow to regain confidence — a case of when, not if."

One area of encouragement has been the number of major media companies announcing their intention to launch over-the-top streaming services direct to viewers. 

Green said:

"There is no doubt that the market will continue to expand significantly and with it the growing demand for the premium services offered by ZOO. Our excitement for the future remains undiminished."

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The company remains profitable and cash generative, although underlying earnings for the year to March 31 will now be significantly below expectations.

ZOO's clients are some of the best-known brands in the world, including major Hollywood studios, global broadcasters and independent distributors.

Its use of cloud technology ensures that content is localised in any language and delivered to all the major online platforms such as Amazon, iTunes, Google and Hulu with reduced time to market, higher quality and lower costs. 

ZOO operates from the entertainment hubs of Los Angeles and London with a development and production centre in Sheffield. 

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