Could the Redbubble Ltd (ASX: RBL) share price be a deep value opportunity after heavy falls?
In just three weeks the Redbubble share price has dropped 36%.
The Redbubble share price could favour long-term investors
Redbubble wasn’t going to be able to maintain triple digit growth forever. The COVID-19 impact on physical shopping was only going to happen once. And it gets difficult to keep growing at a fast pace when you’re dealing with bigger numbers.
The selloff seemed to be because Redbubble said in an update it was going to sacrifice short-term profit for long-term growth with a different focus.
Is that a bad thing? It might be if you believe that Redbubble needs to increase its spending simply to keep growth going.
But I don’t think that’s what is going on. Businesses like Xero Limited (ASX: XRO) and Amazon have shown that excellent growth can be achieved if you have a strong offering and a global addressable market.
Redbubble talks about an addressable market that’s in the hundreds of billions of dollars. It’s (probably) never going to capture a significant portion of that, but it gives Redbubble a big target to aim at. Over the next few years it wants to reach $1.25 billion of annual marketplace revenue.
When it gets that big, it can then benefit from its scale and then start to generate much higher margins. That’s a few years away though. However, margins could climb further in the subsequent years from there.
The trading update
I thought the trading update was actually pretty solid from Redbubble for the third quarter of FY21.
Marketplace revenue and gross profit both increased by around 55%, whilst earnings before interest and tax (EBIT) jumped around 90%.
Redbubble is saying that its EBITDA margin is going to be a lower single digit number whilst investing heavily.
Summary thoughts about the Redbubble share price
With a market capitalisation of around $1 billion, it certainly isn’t super cheap.
But the reduction in the share price offers investors an attractive chance to get into this long-term focused business at a much cheaper price than a few weeks ago.
I’d be very happy to buy some shares for my portfolio. It’s one of the ASX growth shares I’m looking at closely right now.
