You are going to hear from Red bubble (ASX: RBL) bulls that the recent decline in stock prices has created an opportunity for lifelong investment, and operating leverage as they scale will increase profits. Well, today I’m going to talk to Lachlan’s Bull Dissertation why i think it’s furfi.
If you liked Redbubble for $ 6.70, then you’ll like $ 1.61
Being an investor in Redbubble over the past 15 months has been a difficult trip for believers as the stock price has fallen by ~ 77%. I can only assume that the presentation of Investor Day was similar to the invitation to the Red Wedding in “Game of Thrones”.
However, another way to say “$ 1.61 per share” is “a market capitalization of $ 464 million.” No matter what assessment the zealous Mr. Market put on Redbubble in January 2021, the current assessment needs to be considered.
Alloy with cash, question mark?
It is often noted that Redbubble has a balance of $ 143 million. Redbubble gets paid in cash from you and me, makes a t-shirt, ships it, and then takes 90 days to pay its suppliers. Thus, most of this money – $ 91 million – belongs to its suppliers. To be fair, its net cash balance is ~ $ 50 million. And the value of its net assets, excluding their intangible assets (ie goodwill from their acquisition), is about $ 60 million.
So I believe his fair value of the venture is ~ $ 400 million. That’s compared to $ 8 million EBITDA in the first half of 22 years, or an average net profit of $ 15 million a year over the past three years, smoothing the accompanying wind Covid.
Operating lever at the expense of quality
The main argument of Redbubble’s management is operating leverage: as revenue increases, core costs will grow at a slower rate and margins will increase.
Redbubble eventually reduces operating costs to improve gross profit. One way to do this was to switch from screen printing on T-shirts to on-demand printing (which is directly on clothing). Since 2017, the forums have been filled with complaints about the quality of T-shirts: images peel off, inappropriate size and weight and even smell like “rotten fish”. I agree 100%. The shirts I purchased before 2017 remain in my high rotation, while the shirts purchased during Covid are already facing the cut.
These achievements seem unsustainable, and while t-shirts account for only 41% of sales, it is the business model of declining quality that is the red flags.
T-shirt 2017 Donald Trump vs. Kim Jong Un Street Fighter II (quality retained)
T-shirt “End of the World” 2020, which ended with toilet paper (ruined design, with a printout in the center)
2021 Mr. Chop Chop, aka Mark “Chopper” Read the T-shirt (goes out after the first wash)
A platform for artists
Although artists ’profits are hailed as“ gradual change ”, in reality the percentage of artists’ income will increase from 15.96% to 16.66%. Meanwhile, there are concerns about the infringement of intellectual property rights by artists who sell products on Redbubble platforms.
Redbubble argued in court that they are not responsible for the art, only the market. So far in some cases, Redbubble won, some they lostand Hells Angels is now joining the legal dispute. This is a constant challenge to the fundamentals of her business model.
One way for Redbubble to meet artists ’demand for a large share of the pie is to cut them out. Redbubble is developing a new artificial intelligence technology to search the Internet for unlicensed photos for printing on T-shirts that meet individual searches. So recently, when I wanted to buy a t-shirt with my favorite Tony Ebata moment, Redbubble was the result of №1 in a search engine with a monstrous design created by AI using Google low-resolution photos. Maybe over time it will improve, or maybe it’s another question mark in the business model.
Even at today’s prices, the stock price is full of optimism. Redbubble may increase revenue as new verticals expand, but the general concerns I feel about product quality and business model still make it a risky investment.