Redbubble Limited

Company Overview: Redbubble Limited (ASX: RBL) facilitates the sale and purchase of art and designs on products sold by independent creatives to consumers. It operates through its online marketplaces Redbubble.com and TeePublic.com The company’s community of passionate creatives sell uncommon designs on quality products such as apparel, stationery, housewares, bags, wall art, etc. The artisans and sellers are able to profit from their creative works through RBL’s marketplace platforms. The Group primarily operates in the region of North America, Continental Europe, the UK and Australia & New Zealand.

RBL Details

Shift in Consumer Preference to Online Platforms Driving Growth: Redbubble Limited (ASX: RBL) operates an online marketplace for the purchase and sale of creative products. The market capitalisation of the company as on 16 March 2021, stood at ~$1.56 billion. As per a recent update, the company announced that its CEO, Mr. Michael Illczynski has completed the purchase of 361,500 Redbubble shares. The cash consideration for the shares were at ~$2 million, reflecting an average share price of $5.5333 per share.

The company has witnessed significant growth in the past twelve months of operation. It plans to focus on extending the market leadership and invest on enhancing both the artist and customer experiences. The acceleration of e-commerce, along with the combination of on-demand technology and user-generated content has enabled rapid growth for RBL.

The company reported robust performance during H1FY21 period, with marketplace revenue up by ~96% to ~$353 million on the previous corresponding period. There was an increase in the gross profit by ~118% to $144 million. It reported an EBIT of ~$41.9 million during the period, compared to a loss of $1.9 million in H1FY20. There was also a significant improvement in the operating cash flow performance with an inflow of $80 million in H1FY21. It ended the half with an impressive cash position of ~$130 million as on 31 December 2020.

H1FY21 Income Statement Summary (Source: Company Reports)

Decent Rise in Number of Artists: The company’s platforms offer a sustainable print-on-demand marketplace for independent artists. The number of selling artists on its Redbubble & TeePublic platforms grew by ~76% to ~572,000 during H1FY21. A total amount of ~$65 million was paid to the artists during the period.

Increase in Selling Artists (Source: Company Reports)

Accelerated Growth in Customers: There has been a decent increase in the number of unique customers buying from the marketplace. RBL reported ~6.2 million customers in H1FY21, reflecting growth of ~69% on the prior period. The marketing spend remains low at 12.5% of marketplace revenue. The repeat purchasing was decent, with a growth of ~98% to ~$141 million from ~$72 million on pcp. The revenue contribution between the first-time purchasers and repeat customers base has remained consistent in H1FY21 when compared to the prior period. Moreover, there has been increased traction in sales through apps during the period, with a contribution of ~14% to RBL marketplace revenue.

Growth in Customers (Source: Company Reports)

Growth in the Midst of COVID-19 Pandemic: The company has demonstrated resilience during the period and has reported decent growth across most of the key metrics. The December quarter witnessed strong customer demand due to the holiday season, and the company had increased its paid acquisition spend to capture more customers. The mask demand moderated to 7% of the overall product mix in Q2FY21, but the decent growth continued in other product categories and geographies.

Top 10 Shareholders: The top 10 shareholders together form around 47.79% of the total shareholding, while the top 4 constitute the maximum holding. Jellicom Pty. Ltd. and Hosking (Martin) are holding a maximum stake in the company at 8.86% and 6.86%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Key Metrics: The company delivered resilient margin performance during H1FY21 with a gross margin of 34.5%, compared to 31.0% in the previous corresponding period. It reported a positive net margin of 9.8% during the same period. ROE stood at an impressive 45.5% in H1FY21, and the cash cycle days were at negative 27.4 days. There was also an improvement in the leverage position of the company with a reduction in the debt to equity ratio to 0.07x in H1FY21 from a level of 0.15x in H1FY20.

Key Risks: The company operates in a sector which is very competitive in nature and customer retention and repeats becomes a key feature to drive profitability. RBL, in order to mitigate the risk, is focussed on providing an enhanced experience for both artists and customers. It is also exposed to revenue concentration in the hands of a select few fulfillers, and hence the company has implemented a diversification strategy by the integration of new fulfillers and onboarding them in a seamless manner. Being a technology focussed and dependent company, taking care of consumer and customer data becomes utmost important. The Group maintains appropriate data management procedures and practices in place to mitigate the given risk. The company is also exposed to litigation risk arising from its role as an intermediary for user-generated content. The onset of the COVID-19 pandemic has also impacted the company’s operation with challenges in the global shipping network, which resulted in lower margins for the month of December.

Outlook: The company believes that it is well-positioned to continue the growth momentum going forward, aided by the shift to online activity and increased acceptance of e-commerce platforms among the masses. It intends to invest in both the artist and customer experiences in order to improve loyalty and retention and drive growth in the long-term. RBL will continue its focus on artist acquisition & retention, transaction optimisation of users and further product & fulfilment network expansion. 

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

Data Source: Refinitiv, Thomson Reuters, 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.

Technical Overview:

Weekly Chart-

Source: Refinitiv (Thomson Reuters)

Note: Yellow color line indicates trend-line while purple color line depicts RSI Levels. Green lines are indicating volumes on a weekly basis.

RBL is trading in a primary upward trend on the weekly chart. Prices broke the downward trendline resistance of ~$5.6 on December 9, 2021 and prices are sustaining above the breakout line from the past 15 weeks. Prices have recently made an up move and broke an immediate resistance level of ~$6.0 which might take the prices up to $7.0 that is also acting as next immediate resistance level of the stock. On the lower side, prices might find the immediate support level of ~$5.01. RSI (14) is hovering at ~57 level which stands supportive to the stock prices.

Stock Recommendation: The company has reported an improved debt to equity ratio of 0.07x in H1FY21. At the current market price of $5.99, the stock is trading towards the higher band of its 52-weeks trading range of $0.400-$7.350. The stock of RBL gave a positive return of ~47.53% in the past six months and a positive return of ~10.31% in the past one week. We have valued the stock using an 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 might trade at a slight premium to its peer average P/E (NTM trading multiple), considering the decent financial performance, significant improvement in the operating cash flow of the company and significant increase in the number of sellers. For the purpose, we have taken peers such as Adore Beauty Group Limited (ASX: ABY), Temple & Webster Group Limited (ASX: TPW), Kogan.com Limited (ASX: KGN), to name a few, which comes under online retail space. Considering the expected upside in valuation, robust performance in H1FY21, increase in customer base, strong cash position of the company, current trading levels, and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $5.99, up by 4.537% as on March 16, 2021

RBL Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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