Today's business update has not been well received by the market; so far today RedBubble has lost over 1/4 of its market value, and is down roughly 70% in the last year. Ouch!

Back in October last year, the business told the market it expected Marketplace Revenue to be "slightly above FY21 underlying Marketplace Revenue" (underlying strips out mask sales). It also said that EBITDA margin (as a % of marketplace revenue) would be in the mid single-digit range.

Today's update says that it now expects Marketplace Revenue to be "slightly below" FY21's underlying result, with EBITDA margins to be "low single-digit negative".

The margin deterioration was a result of increased competition and increased acquisition costs (marketing -- basically paid search). In addition, it suffered from increased shipping costs.

The company was at pains to point out the longer term trajectory of the business:

So, investors can probably expect FY22 Marketplace Revenue of roughly $495m. After today's drop, the business is now on about 1.2x that. That's hardly demanding for a business that is targeting marketplace revenue of $1.25 Billion in the medium term (2.5x current level). However, sales multiples offer little context without some assumptions of what margins look like at maturity.

The issue then, it seems to me, is about the ability of the business to deliver reasonable margins as it grows -- and not have search companies (Google & Facebook etc) capture most of the value. It may well achieve decent long term growth in revenues, but only operate on razor thin margins.

For example, let's say the business is actually doing $1.25b in revenue by FY25 but only gets a 4% net margin (which, according the the bears may even be still too generous). That'd be around $50m in net profit, or about 18cps (with no additional share issuance). A PE of (say) 20 would give a FY25 price target of $3.60, or $2.58 when discounted back by 10%pa for 3.5 years.

In this context, the previous close of $2.99 does indeed look a bit pricey, and today's price action is not entirely unreasonable.

So that's the conundrum I think. If you think RBL can actually sustain better margins, there's likely a decent opportunity at the current price. If not, and assuming they can keep growing the top line, shares are probably described as fair (at best).

For me, I don't have nearly enough conviction that the business can grow without sustained and significant customer acquisition costs. I'm not sure it will generate enough of a genuine network effect to make it a primary destination of choice for consumers, who will continue to simply google for what they are after and find the lowest cost producer.

Sharing a bearish perspective I came across on twitter by @neke86_

https://twitter.com/neke86_/status/1389092856783015936?s=19

I haven't done the work, but it seemed some good points were raised.

Redbubble has seen an incredible change of fortune. 

Late last year, shares lost their shine after the company reported slower than expected growth due to increased price competition. The price continued to sink lower following a surprise resignation of the CEO and an underwhelming first half result in February this year.

In March, at the height of the Covid panic, shares at one point touched 40c.

Since then, shares have gained an amazing 1200%, with shares up a further 10% today to an all time record high.

Today Redbubble reported a 116% rise in maretplace revenue for the first quarter of FY2021, with Gross profit up 149%. Operating cash flow came in at $27.1m, compared with $10.2m for the same period last year (the company now has over $85m in cash).

Growth was seen across all geographies and segments, although the US (Gross transaction volume up 102%) and accessories (which i presume is things like masks, was up 562%)

You can view today's investor presentation here

Basicaly a platform that aggregates artists' work and allows users to add this to t-shirts, mugs, stationary etc

Seems to hve a good network effect, one of the largest businesses of its kind in the world with some of financial metrics trending really nicely.

Negative working capital -- they collect money from consumers first, and then submit to manufacturers (so no inventory either).

Seems to have good balance sheet which should see it through to cash flow positive

Redbubble has provided a disappointing trading update for the current quarter to date (Oct 1 to Dec 9).

Group revenue growth for Q2 FY20 has so far come in at 20%. This was driven by a solid 59% lift in revenue from TeePublic (which had one month's less contribution in the prior corresponding period), with the Redbubble branded marketplace only growing by 2% -- a massive drop from the 43% growth it saw year on year in the first quarter.

The company quoted increased price competetion in stickers and poor apparel sales.

Redbubble still expects to post EBITDA growth and posiitive free cash flow for the full year.

The market reaction has been brutal with shares presently down ~38%. 

Prior to the fall, the business was very much trading on a growth multriple, with an EV/EBITDA ratio of 115.

Full announcement here