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.
I submitted and created a Redbubble design today (long story short - a colleague made a joke and we thought it would be hilarious to make t-shirts out of it).
The user experience was super simple, intuitive and fast. After whipping up the design, it took less than 5mins to upload, made some tweaks and have the 'shop' opened.
Things to note:
- Creators pay base prices for their own products (Sadly it seems Redbubble does not provide any freebies - had to buy my own product!)
- As part of the process, the creator sets the % margin and this determines the final price. I believe the % margin is paid out to the creator. No listing fees!
- Ability to customise the % margin based on a specified product (eg different % for a Long T-Shirt, hoodie, clock, mouse pad).
- I was impressed by the professional and realistic looking product mockups and human models.
- Redbubble takes care of alot of the 'paperwork' - as part of the process, you can input an ABN, or select an ATO individual use exemption. This really removes the barriers for non-business savvy beginners.
- Creators get paid to an AU back account or Paypal account.
- Ordering process - had to jump out of the cart to run some errands and immediately received an abandoned cart follow up email
- In my opnion the 'base' prices seem quite absurd - ($22-$30 for a T-shirt). A customer that pays full price a T-shirt is looking around the $28-$40 mark.
- Reviews around the quality of the product seems quite mixed. Some comments I have seen suggest previously the materials were better and the quality has gone down since.
- Documentation / help articles were very comprehensive, detailed, and were actually helpful.
- Ability to make a public or private listing
