Over 16 million Redbubble Ltd (ASX: RBL) shares exchanged hands yesterday following a Q3 trading update, which resulted in roughly $400 million being shaved of its market capitalisation.
It seems the market had higher expectations for this high-growth COVID-19 beneficiary that’s returned over 1000% over the past 12 months.
Is this a buying opportunity or is there more pain to come?
RBL share price
Key takeaways
For the quarter ending March 31, marketplace revenue (MPR) came in at $103.4 million, which represents a drop of around 50% compared to the previous quarter MPR of around $205 million.
This is a significant drop whichever way you choose to look at it, but it definitely wasn’t unexpected in my view.
The seasonal nature of retail spending around the Christmas/holiday period is why Redbubble has experienced a slowdown in the last three months.
This time last year, Redbubble reported Q2 and Q3 MRP of $110 million and $65.5 million, respectively, or a drop of around 40%, so a slower Q3 this year doesn’t come as a big surprise.
Artist revenue and operating expenses as a proportion of revenue were both higher in Q3 than the previous quarter, resulting in earnings before interest, tax, depreciation and amortisation (EBITDA explained) of $2.2 million, compared to $23.1 million in Q2.
Why has this happened?
Due to the nature of Redbubble’s working capital cycle, many of its costs for things such as fulfilment and refunds will be recognised after the period where the company first experienced the surge in demand, in this case being the holiday period in Q2.
Where to now?
Redbubble is now sitting on a cash balance of around $102 million, and CEO Michael Ilczynski has laid out a multiphase growth strategy that aims to help the company achieve top-line growth and margin expansion over the next several years.
By calendar year 2024, the business is aiming for $1.25 billion in MPR with EBITDA margin between 10-15%, so roughly $150 million of EBITDA (EBITDA was $5.1 million in FY20).
Due to the planned reinvestment back into the business to support its growth strategy, management expects EBITDA margins to come down in the short-term but is aiming to grow margins to between 10-15% as part of its longer-term strategy.
Summary
For a high-growth company such as Redbubble, I would expect and most likely prefer management to be reinvesting back into growth initiatives rather than distributing capital back to shareholders in the form of dividends or share buybacks.
Some investors might’ve been expecting a potential dividend, which could partly explain the sell-off, but whether a 25% drop in a single day was justified or not is another question entirely.
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