Redbubble released the following announcement on Thursday with an update to the market. Briefly working through the numbers, I think the company will continue to operate on negative cash flow basis until revenues increase or they can cut costs even harder but how do they do that and grow at the same time? Of interest was a new tiered system for artists, three levels: standard, premium and pro. I never believed the story that the "artists" were core to the business, I saw the "artists" more as content creators trying to make something to match the current trending items of the week. The different tiers may allow Redbubble to discourage the use of copyright infringing material through lower financial incentives and incentivise original work, in the same way YouTube incentivises their best channels.

At the moment still firmly on the sidelines...

The trading update for 1HFY23 didn't look good for Redbubble. As a previous shareholder I was surprised how far backwards the business has gone in such a brief time. Revenue is flat for YoY and "operating EBITDA" moved from $10.5m to $-18m for 1HFY23.

When I sold out, I highly doubted the $1.25bn sales target they had for "CY24+". Flicking through the announcements of the past year or so, this blow out to FY26/27 in the presentations and now isn't even mentioned. One of the things I liked about Redbubble is the consistent format of data they provided quickly at the end of each quarter. I note this half end there is no presentation and the financial information provided is not a complete set. Management don't want to be loud about the current condition of the business.

Just a reminder to me how as an investor I should be "reading between the lines" when looking at company announcements and noticing the subtle changes period to period in what the company is saying. Additionally, don't take management's goals as forecasts but as aspirations....

My Redbubble thesis required a sell when growth stops. Q4 was a drop in sales from Q3. While Redbubble is seasonal, Q3 to Q4 is normally an even or increasing quarter. Additionally and more importantly management are expecting sales to be flat for the coming year. The implications of this according to my modelling is very important. Below are the assumptions/results which are more optimistic than what management predicts:

• FY22 MP revenue = $574 mil (management predicting "slightly above" $500)
  • Revenue increases PCP (using quarters) after 1HFY22 of 30%. 
  • Based on 30% revenue increase from 2HFY22, CY2024 MP revenue = $1.13 bil. 
• Management says they are targeting $1.25 bil by CY2024. 
  • Approximately 35% is the required PCP increase in MP revenue starting from 2HFY22 for the $1.25 bil target to be achieved. This uses the FY22 MP revenue figure of $574 mil above for FY22. 

So management is telling investors our growth this year is expected to be zero (or negative) but trust us we will achieve 35% growth from 2HFY22 onwards based on my assumptions. That is a massive momentum shift backwards and then forwards again within two years. How often does that kind of change actually happen? I think Redbubble requires the growth momentum to continue, consumers as a whole don't just turn off and then on products like that. What are they going to do in two years time that will get such large sales growth that they can't pull forward to start doing now? 

Additional issues:

• Copyright infringement is common. 
• I think the artist aspect is overemphasised by the company. After some YouTubeing you can find multiple videos pointing out how once a trend is started there will be multiple close copies of that design in a day. The artist's don't create unique designs, most are just trying to find something to closely copy to make some easy cash.
• Quality of products can be poorer when compared with alternatives. Again Youtube RBL quality comparisons and often other shirt printing companies produce a better end product.

I will not be out for good. I will be watching from the sidelines for the growth to reignite before buying back in. I invested after introducing my wife to Redbubble and seeing how she loves what she can find on Redbubble. Now multiple gifts have been (and continue to be) bought for family and friends. Just don't see the short term trajectory being overly positive for the investor...

On a side note wow what a crazy day on the market! Markets are truely inefficient... I will be selling over the next days/weeks when I figure out how I want to play this market.

I have reviewed my thesis due to a rethink of growth trajectory and poor showing on website traffic pages. Some general points with regards to buy/hold/sell are below.

Reasons to buy:

• PE is around 23-25. Therefore, not expensive for what think is fairly called a growth company with potential. 
• Management has a good plan and clear strategy. New CEO has delivered in the past.

Reasons to hold:

• Would you be doing this review if the share price was $5/6? Probably not...

Reasons to sell:

• Website traffic websites all show a significant decline in popularity for YTD. This is hard to judge exactly how this relates to sales but large growth in search popularity generally matches the sales. See Google trends screenshot.
• Loss of mask sales and COVID lockdown customers. Which were a big boost to sales (this risk was known when investing).
• Questions over whether the same profitability will continue. There were one off bumps from covid that didn't match the normal seasonality of similar results for Q1,3 and 4 with Q2 being significantly larger. I think I underestimated the COVID boost.
• Litigation due to copyright likely to continue. There is quite a bit of copyright material on the platform.

Today's price pop was interesting. Not a lot of volume so if I had to bet on what the cause was it would be amateur traders playing the Australian lockdown or some TA bowl shape I have seen mentioned. RBL makes its money overseas so I see no material change due to the Australian lockdowns/outbreak.

I have reduced my valuation down to $4.19 as a result of my revenue expectations. There is still some margin to play with but not a large margin of safety. 

The thesis is close to being broken based on revised revenue expectations and google trend data. However, these are just guesses/estimates of the future financial results. I will be awaiting FY end numbers to make the final call. My conviction is lowered going forward with a strong potential of a sell occurring.

Expanding on Rapstar's seasonality of earnings straw. In my opinion the only way to compare the quarterly result is with the corresponding quarter. I have created a column graph of marketplace revenue by quarter. The general trends and seasonality are quite clear..

General Notes

• Q3 is normally a bad quarter for RBL compared to other quarters results. I believe the way to compare the results is with the corresponding quarter.
• Presentation appeared to be the new CEOs vision for the company. The CEOs strategy background from time at Seek is obvious.

Positives

• Revenue numbers for quarter we better than thesis required.
• Focus on customer loyalty. I think this is somewhere that can improve so acknowledgement of this is positive.

Negatives

• Market didn't like the announcement around $1 taken off the share price (around 20% drop in one day).
• Companies target is approximately my baseline thesis. Are they under or over promising?
• I felt like they were trying to hid the quarter numbers which wont strong compared to other quarters. Still provided the quarter number results table as per usual.
• Is this a negative inflection point as previous quarters YOY was much stronger? Is company just being realistic about growth from here. My thesis was based on 25% corresponding quarter revenue growth, result was 55%.

Has the thesis been broken?

• No, thesis was based on 25% revenue increases over previous corresponding quarter moving forward with margins the same as historical. On a negative, this is now the baseline of expectations set by the company, they do need to execute. Substantial growth has occurred over the previous year, moving forward I had no expectation that those numbers would continue.
• Need to monitor future quarterly results to ensure growth continues at the expected rate.

Valuation

• Based on companies new projections adjusting the end FY2023 PE to 30 rather than 40 for valuation. Valuation based on 25% increase in revenue with previous corresponding quarter and historical metrics being maintained not improved as predicted by management. Valuation at $6.39 based on this. See Strawman valuation for assumption numbers.

Personal Sediment:

• Hold - Monitor progress for potential buy. Don't understand why the market dropped this heavily. Only hold because I am being conservative that I have missed something. If price drops further there is definitely a buying opportunity but I will wait for positive sediment in the share price.