Company Overview: Redbubble Limited (ASX: RBL) operates through its websites at Redbubble.com and TeePublic.com, which owns and operates the Redbubble and TeePublic online marketplaces, respectively. The marketplaces facilitate the sale and purchase of art and designs on a range of products, and are shipped by third-party service providers. With the help of these marketplaces, independent artists can showcase their creativity and cater to a diverse set of clients.

RBL Details

Rise in Marketplace Revenue Aided by Increase in Gross Transaction Value: Redbubble Limited (ASX: RBL) operates an online marketplace for consumers and provides uncommon designs on high-quality, everyday products such as apparel, stationery, housewares, bags, wall art, etc. to name a few. The market capitalisation of the company as on 22 June 2021, stood at ~$892 million. The company seems to be well-positioned to capitalise on macro trends and expects to benefit from the structural shifts in shopping behaviour of consumers towards e-commerce marketplaces.

The consumer demand for unique and meaningful products have witnessed increased traction in recent times with improved digital penetration. This augurs well for the company and has an addressable market of ~US$300 billion in core geographies and product categories.

During Q3FY21, the company reported a Gross Transaction Value (GTV) of ~$134 million, an increase of ~79% on the previous corresponding period on a constant currency basis. The marketplace revenue also grew by ~76% to ~$103 million during the period. The artist revenue grew by ~82% to ~$21 million. Gross profit stood at ~$40 million and it reported an EBITDA of ~$2.2 million in Q3FY21. There has been substantial improvement in the cash levels of the company to ~$102 million as of 31 March 2021, an increase of ~$44 million from 30 June 2020.

Decent Increase in Cash Levels (Source: Analysis by Kalkine Group)

Decent YTD FY21 Performance: The company posted robust performance during nine months ended 31 March 2021, with growth in marketplace revenue by ~97% (on constant currency basis) to ~$456 million. Gross profit grew by ~114% to $184 million. It delivered an EBITDA of ~$51 million during the period, compared to a loss of ~$2 million in FY20. Operating cash inflow of the company was ~$54 million, from a level of ~$6 million in FY20.

YTD FY21 (9 months ended 31 March 2021) Financial Performance (Source: Company Reports)

Focus on Key Initiatives to Drive Growth: In CY21, the company will focus on artist activation and retention through better understanding their customers and drive loyalty and brand in the process. It will also look to add physical product range and look to scale the third-party fulfilment network.

During CY22-24 period, RBL will focus on the growth of its top-line through a disciplined investment approach. It plans to make investments on its people as well as targeted investments to improve the gross margin and increase the operating efficiency. It will also look to amplify its customer base and make investments in brand to increase awareness among the consumers. In CY24+ period, the company will look to leverage on its top-line and build margin and bottom line, as it starts to realise the benefits of the strategic investments during the past few years.

Top 10 Shareholders: The top 10 shareholders together form around 51.15% of the total shareholding, while the top 4 constitute the maximum holding. Jellicom Pty. Ltd. and Kayne Anderson Rudnick Investment Management, LLC are holding a maximum stake in the company at 8.86% and 8.05%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics: The company reported improved performance in H1FY21 with a gross margin of 34.5%, compared to 31% in the previous corresponding period. Net margin increased to 9.8% in H1FY21, compared to negative 14% in the pcp. ROE of the company stood at an impressive 45.5% during the period. The short term debt of the company as of 31 December 2020 was at $3 million, and long term debt stood at $4.4 million.

Growth Profile and Profitability Metrics (Source: Analysis by Kalkine Group)

Key Risks: RBL operates in a space where there is stiff competition among its peers for a greater market share. As such, the company has to keep its technology updated in order to win consumers and provide a seamless shopping experience. It is also exposed to Google search channel risk and has prioritised search engine optimisation (SEO) work. The company holds key customer information and data in its systems and this is also prone to cybersecurity risk.

Outlook: The medium-term focus of the company is to generate over $1.5 billion in Gross Transaction Value, which will comprise of $1.25 billion in marketplace revenue and $250 million in artist revenue. It expects demand for unique and meaningful products to rise in the future with the market expected to grow over $1 trillion by 2024. Moreover, the expected shift of shopping and purchases from offline to online augurs well for the company in the long run.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:  As per a recent update, Kayne Anderson Rudnick Investment Management, LLC, Virtus Investment Advisers, Inc. and their associates have undergone a change of shareholding in the company and has increased their voting power to 8.05% as of 11 June 2021. As per ASX, the stock of RBL is trading below its average 52-weeks’ levels of $1.520-$7.350. The stock of RBL gave a positive return of ~0.28% in the past one month and a negative return of ~41.11% in the past six months. We have valued the stock using a P/E multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at a slight discount to its peer average P/E (NTM trading multiple), considering the seasonal nature of the business, a discount of NTM trading multiple in regards to its peer's average and stiff competition in the sector. For this purpose, we have taken peers such as Kogan.com Ltd (ASX: KGN), Temple & Webster Group Ltd (ASX: TPW), Adore Beauty Group Ltd (ASX: ABY), to name a few. Considering the expected upside in valuation and current trading levels, impressive results in Q3FY21, robust YTD performance, decent cash position and expected traction in shift to online retail, we recommend a ‘Buy’ rating on the stock at the current market price of $3.480, up by 6.748% as on 22 June 2021.  

RBL Daily Technical Chart, Data Source: REFINITIV

Note: Purple Color Line Refers to Momentum Oscillator Relative Strength Index - RSI (14) Period

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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