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Redbubble (ASX:RBL) share price on watch after Q3 update

The Redbubble Ltd (ASX: RBL) share price will be on watch this morning after another quarter of big growth.

How did Redbubble do in the FY21 third quarter?

The e-commerce business reported that marketplace revenue (which is total revenue minus money paid to artists) increased by 54% to $103.4 million for the third quarter to March 2021.

Gross profit increased 55% to $39.8 million, with the gross profit margin increasing slightly from 38.3% to 38.4%.

However, the company grew its market spending by 71% (faster than gross profit) which meant the gross profit after paid acquisition (GPAPA), or marketing, only rose by 47% to $25.6 million.

But Redbubble’s operating leverage showed as operating expenses only grew by 3% to $21 million. That meant that EBITDA (EBITDA explained) increased by $8.5 million to a profit of $2.2 million. EBIT rose 91% to a loss of $0.9 million.

Redbubble noted that its business is seasonal in nature and its financial metrics should be viewed over a full financial year.

To help investors, Redbubble revealed its numbers for the nine months to 31 March 2021.

Marketplace revenue was up 85% to $456 million. Gross profit was up 100% to $184 million. It had generated $41 million of EBIT and $54 million of operating cashflow to March 2021.

Future goals

In a letter to investors, the CEO explained some of the plans of the business.

Redbubble CEO Michael Ilczynski said that Redbubble is benefiting from multiple trends including the shift to online shopping, the desire from consumers for unique products and a growing ‘creator economy’.

He said that the medium-term aspirations of the business are to grow gross transaction value to more than $1.5 billion, artist revenue to $250 million and marketplace revenue of $1.25 billion per annum.

He said that the business is going to make targeted investments at the gross margin, marketing and operating expenditure lines, which may lead to a reduction of the EBITDA margin.

In 2022 to 2024, it’s going to invest in improving the customer experience, continuing growth in core markets, increasing customer awareness and expanding into new markets.

Beyond 2024, it will look to improved its operating leverage. Once it reaches $1.25 billion of marketplace revenue, it expects a certain level of profitability. The gross margin is expected to be between 40% to 42% and the EBITDA margin is expected to be between 10% to 15%.

It’ll be interesting to see where the Redbubble share price is in a few years.

Summary thoughts

It’s an interesting shift in strategy. This is the move that Temple & Webster Group Ltd (ASX: TPW) recently took – a heavier focus on growth over shorter term profitability.

Investors hoping for steadily growing profit (and even dividends) may be disappointed. The market could view this negatively because it could mean that Redbubble needs to invest more to keep growing strongly (with lower profit margins). It’d be understandable if there was a bit of a selloff of the Redbubble share price today, though that’s not certain to happen.

However, I think Xero Limited (ASX: XRO) is a good example that investing for growth can lead to solid long term results. Redbubble has captured a lot of growth over the last year and the online demand is likely to keep growing.

In my opinion, it’s one of the ASX growth shares to keep an eye on.

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