Data has immense value for those that own and control it. Used in the right way, data providers can create significant wealth for their investors. YouGov has been an impressive example of this in recent years, but does its lofty share valuation leave anything on the table for prospective investors?
The value of data
The stock market is littered with examples of businesses that have been great investments because of their ownership and use of data. These range from giants such as Google-owner Alphabet (US:GOOGL) and Facebook (US:FB), which have gathered huge amounts of data about their users’ interests to generate massive advertising revenues, to stock exchanges that can command large fees for financial data.
Tesco (TSCO) built a competitive advantage in food retail with its Clubcard data, while companies such as RELX (REL) have built valuable business on the back of a mountain of scientific and legal data.
YouGov (YOU) has used the power of the internet to turn what was once a labour-intensive market research business into a lucrative value-added research and data analytics business. Its track record of growth and innovation is impressive and it has big ambitions for the future, which has seen its share price take off.
Does the company have what it takes to deliver on and exceed the high expectations currently baked into its share price?
Using data ownership and technology to build an increasingly valuable business
YouGov wants to be the world’s leading provider of marketing and opinion data. It wants to use its data to help its customers to serve their existing customers better – by knowing more about their preferences – and allow them to win new ones.
The key to YouGov’s business is its huge online database known as the YouGov Cube. Data is collected from a consumer panel of 9.6m people in more than 40 countries. The panelists are all online and complete regular surveys on a wide variety of topics to provide YouGov with sources of live, continuous streams of data that is uploaded to the Cube.
This proprietary data in the Cube is the company’s key asset. It provides a single source of data – in many cases going back over a decade – that differentiates it from many of its competitors and is very difficult for a new industry entrant to copy.
The company then adds to this data from the Cube by integrating it into its online data analysis tool, called Crunch. This allows its users to quickly and simply use the data and turn it into useful and valuable information for their business or organisation. Its data tools apply sophisticated statistical analysis and have developed a reputation for effective predictions about markets and events and when things might change.
YouGov markets its services to advertising and marketing companies, media agencies, brand owners, public relations firms and governments. It offers them under three separate areas of business.
Data products (32 per cent of total revenues)
Its data products division offers various services on a subscription basis. It covers key areas such as consumer brands, but has also branched out into areas such as sports, TV and films.
Its BrandIndex product allows users to find out what consumers think of their brands and their competitors' at any given moment and track changes in preferences over time. The brand data is updated daily in most cases, with 20,000 consumers surveyed every day in more than 40 national markets.
YouGov Profiles compliments BrandIndex and contains huge amounts of data on demographics, lifestyles, attitudes, interests and views consisting of more than 300,000 variables from panelists in a given country.
BrandIndex and Profiles are now being combined in a new product called YouGov Plan & Track, which identifies target audiences of potential consumers for products. These can be used to develop more effective marketing and advertising campaigns by its customers.
Data services (25 per cent of total revenues)
This division is underpinned by the Omnibus business, which is sold to customers as a quick and effective way of finding out people’s attitudes, opinions and behaviours. The most well known example of this is an opinion poll before an election.
Custom research (43 per cent of total revenues)
This is still YouGov’s biggest business in terms of revenue and is a throwback to the company’s roots as a market researcher. It focuses on bespoke research products and areas such as brand studies and customer profiling. It is backed by a team of sector specialists that can analyse markets and look at the opportunities and challenges within them.
Its main areas of sector expertise are in consumer, business reputation, financial services, media and politics.
The scope of work varies from large multinational projects to one-off surveys. The company is trying to migrate a lot of this kind of work to the subscription services of its data products division.
The revenue mix of the business has changed significantly over the past five years, with a shift away from custom research to higher-margin data products.
In terms of geography, the Americas is the largest source of revenue and profits, accounting for 39 per cent and 42 per cent, respectively. The UK accounted for 29 per cent of revenues and 38 per cent of of operating profits in 2019.
Competitive positioning and growth prospects
The global market research industry was worth over $47bn in annual revenues in 2018, according to market research industry group ESOMAR, with more than three-quarters of it in North America and Europe. Against this backdrop, YouGov is a tiny player in a global context, with annual revenues of £147m in the year to January 2020.
It has a leading position in the UK market and has spent time building up its position in the US market, but faces lots of competition from big players such as Gartner and others such as IHS/Markit, Forrester, Kantar and Nielsen. There are also several niche companies that target specialist markets.
Yet YouGov’s organic revenue growth rates have been very impressive in recent years, which suggests that it has a strong competitive position.
The key to the competitive positioning of the business is its consumer panel, which has been growing rapidly in recent years. Without it, YouGov would not be able to get the quantity and quality of data to base its technology and services on.
The size and geographic reach of the panel has allowed YouGov to enter new markets and grow in new ones. However, the company’s most important asset is also shrouded in some mystery as to how much it actually costs.
The company does not explicitly state how much it spends on paying its panelists, but from what I can see this immensely valuable source of data is not costing YouGov a lot of money. In fact, it looks very cheap. Given how scalable this data is, it has the potential to drive down the cost of serving customers over the long run and is a major source of competitive strength.
The company does pay to acquire panelists. It also pays them for filling out surveys. Panelists acquire points for each survey and those points can be turned into cash or benefits in kind. For example, 5,000 points is worth £50.
There are some clues as to how much the panel costs each year. The company capitalises additions to the panel on its balance sheet and amortises the spend over three years through its income statement as it deems this to be the average life of a panelist.
Maintenance panel costs are expensed against revenues. There is no separately disclosed amount for this, but there is a provision on the balance sheet which is the management’s best estimate of the incentives accrued by panelists at the balance sheet date. In the provision note we can see the amount provided for during the year and the utilisation (cash spent).
Using the panel additions to intangible assets and the provision we can get a feel for some, but maybe not all, of the panel costs for YouGov during a year.
Here is the provision:
YouGov: panel incentive provision
% of max incentive
Source: Annual reports
We can see that the amount provided every year has gone up, which makes sense as the size of the panel has grown. The provision is an estimate and is a percentage of the maximum potential incentive liability as some panelists will leave and not collect their payments. It is interesting to note that YouGov has been having to provision an increasing proportion of the maximum incentive in recent years.
It has also been spending more to acquire panelists and the amortisation expense has been increasing.
YouGov: Panel additions and amortisation
Source: Annual reports
If we add the amortisation and the amount provided each year for incentives we can see a figure for the amount of panel cost expensed against revenues. The additions and provision utilisation are an estimate of the cash spent.
Expenses are greater than the cash spent and have been rising as a percentage of revenues in recent years, but not significantly so. It must not be forgotten that YouGov needs to keep its panelists happy so that they stick around, make high-quality contributions to the data library and, importantly, don’t switch to a competitor.
YouGov: Estimated amounts expensed and cash spent on panel
Exp as % of sales
Source: Investors Chronicle
The company is making a lot of effort to make panelists feel part of the data system by personalising their experience and sharing results with them. It has also taken big steps to protect their privacy in a GDPR compliant world. What this means in practice is that panelists can decide what data they are happy to be shared. They can edit, add or delete data from their profile.
This is allowing YouGov to launch a new product called YouGov Direct, which will allow users to view the data of its panelists without their privacy being compromised and without it being mediated by YouGov to create an ethical, self-service research product that could become an additional source of competitive edge.
Additional investment is also being made in websites, mobile apps and dashboards to make it even easier for customers to work with the data. Ease of use or the lack of it is a key way to win and keep customers and is always money well spent.
Money is also being spent on branding by allowing the general public to view some data for free. It is also hoped that this will help with panel engagement and showcase the type of data available.
So far, it seems that the investment in the business and its products is paying off. YouGov is still a relatively small player on the global market research stage and if it can woo customers with its offer and grab a bigger slice of this large market then there are certainly grounds for thinking that the days of rapid growth have some way to go.
Half-year results to the end of January 2020 saw the company post rates of underlying revenue growth of 27 per cent in the data products division, 7 per cent in data services and 11 per cent in custom research. There was a continued improvement in operating margins as the business again saw a shift in revenue mix towards higher-margin data products (35 per cent profit margin versus 18 per cent for data services and 22 per cent for custom research).
Big growth targets, management pay and shareholder dilution
Management has set itself some ambitious growth targets for the four years between July 2019 and July 2023. If the targets are achieved the chief executive will pocket nil-cost options in shares equivalent to 12 times his 2019 basic salary or £3.2m under the 2019 long-term incentive plan (LTIP). The targets for the full benefits to be earned are:
- Double group revenue
- Double adjusted profit margins
- Adjusted compound average annual growth in adjusted EPS of more than 35 per cent.
If achieved, the changes over four years would be very impressive and may even justify the current share price of 785p, which looks incredibly expensive against historic profits.
YouGov: 2019 performance vs potential 2023
Earnings yield at 785p
Source: Annual reports/Investors Chronicle
But there are a few issues with this LTIP. As with any plan based on earnings per share (EPS) there is an incentive for management to buy its way to its bonus with acquisitions. It is also worth noting that YouGov’s adjusted EPS ignores share-based payments and the dilution that will be caused by the exercise of outstanding options. The current rate of potential dilution is 6.5 per cent, but this has the potential to increase as the company progresses through the LTIP period.
Having said this, the company’s historic track record of improving its financial returns is very good.
YouGov: Key financial performance measures (£m)
Invested Capital ex-Goodwill
ROCE ex Goodwill
Debt to FCF
Capex to Sales
Source: Annual reports/Investors Chronicle
We can see the company has already seen tremendous progress in operating margins since 2015 (based on profits that are stated after the amortisation of intangible assets, which the company used to ignore), which shows the benefits of scaling the business and positive shifts in revenue mix to higher-margin products.
The company has used acquisitions to grow, but is making a very healthy return on capital employed (ROCE) nonetheless and a superb one on its operating assets, which exclude goodwill paid to buy companies.
Free cash flow margins are impressive and growing despite the capex-to-sales ratio increasing quite significantly over the past 18 months.
In short, YouGov has many of the hallmarks of a quality growth stock with a debt-free balance sheet (if leases are excluded). These types of shares are scarce on the UK stock market, are highly valued and deserve to be. The business is also not seeing any negative impact from Covid-19 and has a workforce that is well suited to remote working.
My guess is that management will not have signed up to an LTIP that it cannot achieve. If it achieves it in the right way – without big acquisitions – then even taking into account the potential dilution from new share issues, it’s possible to make a case for buying the shares now based on the view that the share price could be materially higher in three years’ time. On a price/earnings (PE) ratio of 20 times in 2023 the share price would be 990p.
There is often a fine line between overpaying for growth and being afraid to pay up for it. No doubt a lot of future growth is priced into YouGov shares right now and there are a few issues with how it calculates its adjusted EPS, but if organic growth remains strong and interest rates stay low then it is a share that may continue to defy the valuation sceptics.