There have been some heavy selloffs for a few ASX shares this week. I would be willing to buy Redbubble Ltd (ASX: RBL) after the savage decline.
It’s interesting how share prices can move so much in a short amount of time in response to a short-term impact on the business. I think that can create opportunities to buy good businesses that are going through a difficult time.
Whilst some problems like the one that A2 Milk Company Ltd (ASX: A2M) is facing might be longer-term, there are some selloffs that may simply be offering us a better price to buy.
But you need to judge for yourself if it is an opportunity. Sometimes one disappointment can lead to more. But, no-one can know what’s going to happen in the future with the share price. But in five years time, I think a particular beaten-up ASX share could be making a lot more sales and hopefully have a much higher share price.
What happened to the Redbubble share price?
Artist-designed product e-commerce business Redbubble saw its share price fall over 25% over the last two days of the week after providing a trading update and announcing a change in strategy. It has fallen even further from January where it reached a high of around $7.
The actual trading update was pretty solid in my opinion. Marketplace revenue grew 54% to $103.4 million, gross profit went up 55% to $39.8 million and EBIT (EBIT explained) rose 91% to a loss of $0.9 million. It’s seasonal, which is why that quarter was a loss – EBIT for the nine months to March 2021 was $41 million (up from a loss of $12 million over the prior corresponding period).
Redbubble was demonstrating continued strong growth and operating leverage.
But then the company said it was going to heavily invest for growth, rather than see profit steadily rise over the next few years.
Redbubble thinks there’s a huge potential market to be won.
From 2024, it’s expecting $1.25 billion of annual marketplace revenue, with an EBITDA margin (EBITDA explained
) of between 10% to 15%. But between now and then, the EBITDA margin is going to be in the mid single digit range.
It’s not too surprising that the share price was sold off so much. In 2019 A2 Milk suffered a sell-down as it lowered its margin to invest for more growth. Some investors prefer immediate profit generation over long term growth.
Is it a good opportunity?
But there is merit to Redbubble’s strategy. Look at how much growth Xero Limited (ASX: XRO) and Amazon.com Inc. (NASDAQ: AMZN) have managed to generate over the last decade by heavily re-investing. Paying taxes on profit is good for society, but for Redbubble it can make more sense to re-invest that money to generate long term growth rather than pay taxes.
If you’ve followed Redbubble for a while, you’d know that its share price can be volatile. Indeed, just before COVID-19, there was a selloff from around $1.80 to $1.
I believe Redbubble is a long-term, 5-year opportunity at this share price with a big investing strategy and a large target market. But I know that the share price could fall further this year because some investors wanted profit now rather than later.
It’s one of the ASX growth shares that I’m going to keep a close eye on.
