Redbubble business model - Claude Walker 

I can't argue against first principle research. Follow Claude in "a rich life". I misunderstood the network effect, and I think it is a great lesson for investors. Do not take company presentation deck for granted; research the product first before looking at the presentation slides. 

The article is free to read, but I will summarise the main points: 

1. "Network effect" compares wrong metrics and is a myth.
   • "Redbubble's business model is better compared with smaller online apparel retailers who need to advertise extensively on google (which Redbubble does)."
     • Quite true. If Redbubble had a network effect, then marketing spends should plateau, not increase. The new CEO made it clear that they will spend more capital in the next 4 years. 
     • They spent $45m, more than 10% of its revenue, on marketing costs. They have to do it to keep the 3 sides network effect alive. 
     • I made the mistake of not looking at the capital Redbubble need to keep the business growing. 
2. Redbubble "flywheel" is prone to legal liability. 
   • "The ugliest part of the Redbubble stock promotion is the complete disregard some shareholders have for the fact that the company profits from the stolen IP of artists around the world. If you are a Redbubble shareholder, there are only two possibilities: you have not done your research, or you simply do not care that theft is a part of their business model. Search "Banksy" into Redbubble, and you'll see what I mean." 
     • I was not aware of this red flag. I guess my reason for this blindside was that I previously tried to trick the redbubble platform. I did a Darth Maul design and put it on Redbubble. After 3 hours, the design got rejected due to copyright infringement. Therefore, I concluded that Redubble does not allow artists to put stolen IP into the platform. However, I was unaware that Redbubble could steal an artist's IP outside of Redbubble and put it into the Redbubble platform. Until there is legal action, it does not cost Redbubble anything.
     • "Print-on-demand marketplace Redbubble owes teen fashion retailer Brandy Melville $520,000 for contributory counterfeiting of two of its trademarks, a California federal jury found Wednesday in a finding that holds Redbubble liable for printing and distributing works listed by its users." 
     • Brandy Melville most likely not be the only one.
3. Please do not listen to influencers on Twitter, Youtube and other online forums (then again, I am turning into one, so do not listen to me). A better way of saying it -> do not listen to influencers blindly:  
   • Everyone from sensible professional stock pickers to clueless amateurs, the powerful lesson was that Redbubble was analysed incorrectly - shame to say, but I am inside that spectrum. Luckily, I did not put too much weight into the stock. 
   • Financial Youtube channels only serve to capture attention, not provide insight. They provide unlicensed financial advice even though they make the general advice disclaimer. Luckily for me, I am covering one stock in detail in my youtube channel - Janison to provide more insight than the "finfluencers". Also, I am aware of the financial advice disclaimer hence not recommending you to invest. I like putting my research out there for everyone to see. However, most of my research is put on strawman so that people can come to the correct conclusion faster. 
   • The major failing of strawman is that members came to the wrong conclusion of Redbubble. We did not test the thesis. Claude broke the thesis down. Next time, we should try the platform/product ourselves before making a judgment call. 

After looking at Claude's deep analysis, Redbubble has become a challenging company to analyse and invest. The business is no longer ethical, the evidence is strong, and it will cost the company long term with ongoing legal fees. The worst part of the business is that Redbubble is only a platform. They do not have unique IP to prevent artists from leaving the platform. The true moats in network effects are Google, Facebook, Apple and Amazon. They trap you in the ecosystem and monetise you (directly/indirectly).    

North American companies reported last week, and I thought about comparing key ecommerce companies using the metrics below.  

The metrics that I chose were:

• Number of sellers 
• Number of buyers 
• Gross Transaction value (GTV)
• Revenues 
• Net transaction Margin (NTM) which is revenues / GTV
• Gross Margin 
• Operating Margin
• Average transaction spend per buyer (GTV/ no. buyers)
• Market Cap 
• EV/EBITDA    

Companies

• Etsy 
• Shopify
• Amazon
• Ebay
• Square
• JD.com
• Alibaba
• Pinduoduo 
• Kogan 
• Redbubble  
• Temple & Webster 
• Adairs 

There are missing data points regarding customers and merchants especially for Amazon as they present their numbers under overall sales. Despite this, most key metrics are available for each company. I added Square just for fun, to see if they were an ecommerce company where would they fit?

An interesting insight from the data is that Redbubble has double the users of Kogan but the market cap is equivalent. The main takeaway is that Australian ecommerce companies have orders of magnitude fewer users than their American counterparts. It is perhaps the main reason why Australian ecommerce companies trade at a discount. 

Since the last straw, Etsy came out with their Q4 2020 results:

• Increased sellers by 600k to 4.5M
• Increased buyers by 12M to 81M
• Increased GTV by $3.6B to $10.3B
• Increased revenue by $600M to $1.7B (I made a mistake there, the Q3 YTD revenue was actually $1.1B not $800M mentioned in the previous straw)
• Regardless, the result was very impressive and to me proves that Etsy is more valuable than Shopify despite fewer sellers and buyers. The margins are much better with Etsy.            

The best company to compare Redbubble is actually Etsy not Kogan. Etsy provide very similar products using ecommerce. As Etsy call their platform "the creative marketplace".

Both platforms have buyers and sellers but the difference is that the design is sold at Redbubble while the product is sold at Etsy. With Etsy you need to keep inventory while Redbubble takes care of inventory. Redbubble is more capital intensive as they have to build the product using the artist design. 

Marketplace Revenue  

Etsy = $839M as of October CY2020 (4Q will be out on Feb 25)

Redbubble = (349-180+353) = $522M as of December CY2020

So, Etsy will have ~ 2x more revenue than Redbubble prior to Q4 results, and is currently valued at $28B in the Nasdaq exchange. Redbubble's current market valuation is $1.6B, that is ~14x  valuation difference. If Redbubble was to list in the Nasdaq, it should get a much higher valuation and the valuation difference would not be as extreme.

Platform Economics 

Redbubble

• 572K artists (sellers)
• 6.2M customers (buyers)
• $442M Gross transaction value

Etsy 

• 3.5M active sellers
• 69M active buyers (27M repeat buyers = buy more than one product)
• $6.7B Gross transaction value

Operating Metrics 

Gross Margin (Gross Profit / Revenue)

• Redbubble - 41% 
• Etsy - 72% (including service revenues)

Operating Margin (EBIT / Revenue)

• Redbubble - 12%
• Etsy - 19% (including service revenues)

Thoughts 

In the unlikely scenario of Redbubble catching up to Etsy, I would not be surprised to see the market revalue Redbubble closer to Etsy. If that were to happen, it would mean Redbubble have become a large player in North America. Very rare to see Australian tech companies grab market share in North American markets. Looking at history, either our tech gets acquired or we get outcompeted by US tech firms with stronger network effects. 

Looking at the data, Etsy wins hands down on all metrics - they are stronger than Redbubble. However, the ecommerce market is massive and there is a strong case to be made that the TAM keeps going up as more people operate their businesses online. Thus, Redbubble can maintain growth as the market is growing faster.

Another reason to own Redbubble is a potential acquistion by a company like Etsy. Etsy has $1.15B of cash on their balance sheet and could buyout Redbubble cheaply for $2B. Shareholders should not agree if they feel Redbubble has more room to grow. Corporate consolidation is the next stage for ecommerce companies and I think if Redbubble starts stepping on Etsy's turf we could get an acquisition offer.      

In saying that, we are yet to see how Etsy performed in Q4 CY2020. Redbubble had a great (July-December) with revenues most likely coming from the last quarter (September - December) holiday period. Hence, it would not be outlandish to assume that Etsy would also have similar growth in the last quarter of 2020. Etsy could have a monster Q4 with $800M revenues which would mean $1.6B for 2020. It would extend their lead with 3x more revenues over Redbubble. If I were a Redbubble investor I would keep a very close eye on Etsy.

Amazing result by management 

• $353M in marketplace revenues up 105% from 1HFY20 on constant currency basis
  • $141M is repeat purchases and $212M are first time purchases. The growth in both repeat and first time purchases was an amazing achievement by management.       
• $144M in Gross Profit (41% Gross margin)
• $42M in EBIT (12% operating margin)
• $130M cash in the balance sheet 

In other words, they are printing cash with $80M positive operating casflow. Here's some more unit economics: 

• 572K artists on the platform 
• 6.2M customers spent $442M worth of product    
• 41 fulfillment centres globally
• Marketing Spend low at 12.5% MPR (which I think is Marketplace revenue)
• 14% of revenues came from the Redbubble app. 
• North America makes up 70% of total sales.  

Next step is to compare this result with Kogan on Feb 26