Shares in online marketplace Redbubble Limited (ASX: RBL) have fallen an additional 7% today, which now means its market valuation has fallen by around 35% since releasing its latest Q3 results three weeks ago.
Redbubble isn’t alone in this recent sell-off by any means though. It joins many other high-growth companies that proved to be COVID-19 beneficiaries of 2020, including Afterpay Ltd (ASX: APT), Zip Co Ltd (ASX: Z1P), NextDC Ltd (ASX: NXT) and Temple & Webster Group Ltd (ASX: TPW), just to name a few.
As the world continues to push through a vaccine-led recovery, it seems that the market thinks many of these companies won’t stand to benefit like they previously have through government-mandated lockdowns and restrictions.
RBL share price
Q3 update recap
For the three months ending 31 March, Redbubble reported a slowdown of marketplace revenue (MPR) of around 50% on the prior quarter to $103.4 million.
This pattern of a slower Q3 coming out of the busier holiday season has been consistent over the years, but it seems that investors were expecting consistently higher growth rates considering much of the world is still affected by COVID-19.
Redbubble CEO, Michael Ilczynski laid out a long-term growth strategy for the company that will aim to achieve top-line growth while sacrificing some short-term profitability through increased reinvestment.
By 2024, the business is aiming to achieve MPR of $1.25 billion with earnings before interest, tax, depreciation and amortisation (EBITDA explained) margins between 10-15%, so around $150 million.
Was Redbubble’s update cause for concern?
A typical bear case for Redbubble would likely point out that the company may have been a once-off beneficiary of COVID-19 that struggled to operate profitably prior to the pandemic.
Marketing spend has also risen as a proportion of revenue and gaining new customers is partly at the mercy of Google search algorithms working behind the scenes.
These are all valid points and I think it’s likely that the short to medium term might be challenging for Redbubble.
As my colleague, Raymond Jang pointed out in his article, it will be useful to keep an eye on customer acquisition costs and how this compares to other growth metrics and its position in the industry.
As a long-term investment, I still like Redbubble because I think its business model could allow it to incrementally compound reinvestment back into its three-sided flywheel network, which you can read more about here.
I take some additional comfort knowing that management is still aligned with shareholders, with Michael Ilczynski recently picking up $2 million worth of shares at around $5.53.
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