Is the Redbubble share price about to burst?

The Redbubble Ltd (ASX: RBL) share price has soared an astounding 759% from its low in late March. But, like much of the wider share market, the Redbubble share price is today falling sharply lower.

Redbubble is an online marketplace that allows independent artists to connect with customers and fulfil orders through print on demand technology. 

The online retailer has been a clear winner during the COVID-19 pandemic. With consumer spending patterns changing, Redbubble has seen enormous growth in its online marketplace.

This growth has been reflected in the Redbubble share price. However, given its meteoric rise, many investors may now be questioning the sustainability of such a run.

How has Redbubble performed?

In late August, the company reported an impressive performance for FY20 which resulted in the Redbubble share price edging higher.

The company’s annual report was highlighted by a 36% lift in sales revenue for the full-year of $416 million. Redbubble also reported operating earnings before interest, tax, depreciation and amortisation (EBITDA) of $5.1 million. This represented a $7 million turnaround from the company’s $2 million deficit in FY19.

According to Redbubble, the surge in sales revenue was attributed to consumer demand for face masks. Mask sales accounted for $12.1 million in revenue.

Redbubble was also a haven for artists and small-businesses impacted by the pandemic. As a result, the company doubled its number of selling artists to 511,000 for FY20.

Is Redbubble’s growth sustainable?

As a result of securing more independent artists, Redbubble believes that more customers will be attracted to the platform. The company has a global supply chain, with over 60 product offerings including stickers, t-shirts, art and home décor.

In FY20, Redbubble also managed to improve its marketing efficiency and reduce operating expenditure. If the company is able to retain artists and drive repeat customers, it should be able to retain its rate of growth.

In addition, Redbubble has a few structural tailwinds in its favour. These include the emergence of the ‘stay at home’ economy and irreversible shift to online shopping. A recent note from broker Morgan Stanley has reiterated this outlook for Redbubble.

Is today’s Redbubble share price a buy?

The Redbubble share price has, historically, been correlated with an accelerating and decelerating growth profile.

Despite reporting substantial growth, the company still reported a net loss for FY20. As a result, I can’t justify Redbubble’s current share price based on its recent performance. This is despite the Redbubble share price falling 9.6% lower to currently trade at $3.95, at the time of writing.

The fact that mask sales were a key driver in sales revenue also makes me question how sustainable the company’s future growth is. No doubt, Redbubble does have the opportunity to take advantage of structural tailwinds post-pandemic. However, I believe the company needs to see repeat business consistently in order to justify its current valuation.

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Motley Fool contributor Nikhil Gangaram has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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