The Redbubble Ltd (ASX: RBL) share price may be poised to hit another record high this morning after it posted a solid profit result.
The RBL share price more than tripled in value since the start of calendar 2020 and closed at $3.55 yesterday when the S&P/ASX 200 Index (Index:^AXJO) lost 8% of its value.
The online market place for artists is benefitting from two COVID-19 tailwinds. The acceleration towards online transactions in this new socially distanced world and surging demand for fashionable facemasks.
Big jump in sales and bigger jump in earnings
These trends triggered a 36% jump in its Marketplace revenue to $349 million while operating earnings before interest, tax, depreciation and amortisation (EBITDA) surged 141% to $15.3 million.
The generally weaker Australian dollar is also giving the group a boost. In constant currency terms, revenue was up a more modest 29% as EBITDA improved 123%.
Ballooning margins is the real share price kicker
What’s maybe more exciting is that profit margins for the group is expanding rapidly. This is likely due to operating leverage, and tech platforms typically have lots of that.
As a large proportion of costs are fixed (such as investment in IT infrastructure), any rise in revenue will have a bigger impact on earnings.
A scalable business like Redbubble should have little trouble maintaining its margin growth trend as long as it can keep growing sales.
Not all companies benefitting from the COVID chaos can claim stronger margins. Woolworths Group Ltd (ASX: WOW) is one example as panic buying led to a sales surge but an increase in costs.
Strong start but cloudy outlook
On that front, management said FY21 kicked off to a strong start with Marketplace revenue (measured on paid basis) jumping 132% in July over the same month last year. Sales in the first two weeks of August grew at a similar pace too.
However, the company declined to offer any sort of guidance, which isn’t surprising given the unpredictable COVID-19 situation.
Another possible negative is the recent bounce in the Australian dollar. Currency experts believe the Aussie battler is likely to make further gains over the next 12 months or so. This is due to the resilient iron ore price and the general expected weakness in the US dollar.
Business expansion and cash flow
During the last financial year, Redbubble expanded its fulfilment network to Europe, Canada and the United States. It now operates across 10 countries with 37 fulfillers in 41 locations.
There was also a 51% increase in the number of selling artists to 511,000 and a 30% rise in unique customers to 6.8 million on its Marketplace platform.
Shareholders will also be pleased that its free cash flow turned to a positive $38 million. This compares to an outflow of $200,000 in FY19.
Just don’t expect a dividend anytime soon, although this shouldn’t be a problem as investors don’t buy tech stocks for income but for growth.
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Motley Fool contributor Brendon Lau owns shares of Woolworths Limited. Connect with me on Twitter @brenlau.
The Motley Fool Australia owns shares of Woolworths Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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