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Date : 02/03/2021

Redbubble Limited

ASX :

RBL

Market Cap : $1.38 Billion

Buy

52 Week Range : $0.40 - $7.35

Share Price : $5.36

Redbubble has had a positive half year earnings season. Given the consolidation, we issue a "Buy" recommendation.

Company Analysis

Redbubble is one of the success stories of 2020. The shares have returned over 460% during the period. Despite posting excellent numbers, Redbubble’s share price tumbled. The reason looks to be the impact Covid19 has had on the firm’s order fulfillment capabilities. The growth has been so high during the festive season that Redbubble was unable to keep up with the supply chain and global shipping that is needed to fulfill all the orders. Shipping costs during the pandemic have skyrocketed – leading to lower profit margins during December.


Source: Tradingview.com

It is a growth stock, and any consolidation is usually high when dealing with high P/E stocks. Redbubble has a beta of 1.6 – meaning that it is 1.6 times more volatile than the ASX 200.

Redbubble posted a very strong result for the FY2021 half-year earnings. However, the stock price tumbled over 18%. All the key metrics in Redbubble’s earnings were very positive and in line with the previous growth numbers that we are used to seeing from Redbubble.

Company Updates

Marketplace revenue grew a whopping 96% to $352.8 million. There was very strong customer demand during the festive season in all the regions that Redbubble operates in. There were 572,000 artists using Redbubble to boost their sales – signifying a 76% growth year-on-year.

Most of these sales came from the USA – accounting for 69%. The European Union, United Kingdom, and ANZ region were responsible for just 14%, 11%, and 6%, respectively. These numbers show that Redbubble is continuing to dominate in the market that matters the most for its high growth numbers to sustain for a period of time.

Gross profit increased by 118% and came in at $144 million. Operating cash inflows generated was $79.7 million compared to $40 million this time last year. Earnings before interest and tax has improved massively as Redbubble reported $41.8 million, as opposed to the $1.9 million loss that was reported in the previous corresponding year. It has indeed been quite the growth story for Redbubble. Their flywheel business model is operating in full swing and there is a lot of growth still to come.

The balance sheet looks strong as well, Redbubble’s cash balance at the end of December 2020 grew to $130 million.

Outlook

It takes time to become a great ecommerce retailer. Redbubble’s marketplace is growing, and artists are flooding in. The company is also looking to concentrate on improving the quality of their products now that the design department is sorted. As we mentioned earlier, there were over 500,000 artists selling on Redbubble.

The firm has grown in the past 12 months and is operating at a much larger scale than it did. Consistently strong customer demand has been seen during this time. The firm increased its paid acquisition of customers and artists in order to drive sales. This increased the customer acquisition costs in the short-term. Redbubble announced that its healthy demand continued into January and that they are focussing on 4 initiatives:

  • Artist acquisition, activation, and retention
  • User acquisition and transaction optimisation
  • Customer understanding, loyalty, and brand building
  • Further physical product and fulfilment network expansion.

We expect Redbubble to increase its penetration by adding more products to its mix and also find a way to improve on the quality of product offerings. This dip, in our opinion, provides an opportunity to investors who believe in the story that Redbubble is carving out for itself.

Our detailed analysis of Redbubble’s business model, metrics and finances can be viewed by clicking here.

Recommendation

The recent consolidation of Redbubble stock price can be attributed to three events:

  • The decrease in margins as shipping costs increased
  • The rise in customer acquisition costs
  • The volatility in the global bond market triggering volatility in global equity markets

Redbubble will become profitable in FY2021. It is currently undervalued and there is a lot of growth ahead. Amid volatile bond markets and the global macroeconomics at play, there will be a degree of volatility in the short-term. Mid cap growth stocks are a game of patience and the consolidation opens up an opportunity for long-term investors without exposure to “Buy”.

 

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