Shares in Redbubble Ltd (ASX: RBL) have continued to spiral downwards throughout the session after the ecommerce company released its third-quarter and year-to-date update. At the time of writing, the Redbubble share price has collapsed 20.51% to $4.38.
Looking at the company’s growth alone doesn’t quite explain the dramatic fall. So, let’s take a look at what exactly could be pushing the Redbubble share price down.
Aspirations don’t fill investors with confidence
Redbubble delivered growth in its gross transaction value, marketplace revenue, and gross profit. That all looks well and good until investors have to stomach compressed margins.
At the end of the day, long-term investing means profits. And ideally, those profits get bigger to deliver increased shareholder return. Well, the Redbubble share price has left its shareholders unsettled by its plans to sacrifice profit margins to deliver its ‘aspirational’ $1.25 billion revenue vision.
“How much?” you might ask. The company expects to reduce its earnings before interest, tax, depreciation, and amortisation (EBITDA) margin to mid-single digits. For comparison, Redbubble’s current margin is 9.5%.
The next question, “For how long?” It’s going to be a rougher ride for the next few years.
After that though, Redbubble expects its margin to range between 10% to 15%. However, that is an aspiration. The problem with aspirations is that shareholders don’t know whether they will come to fruition. But they certainly know returns will now be lower than originally expected in the near term.
So $RBL investors need to go through 3-5 years of increased investment and lower profit margins so in 4-5 years they can make $150M Ebitda 🤔
I don’t think market will like this today…. I could be wrong, but I’m glad we sold out at $7.00 pic.twitter.com/U4I4JHN5qz
— Ron Shamgar (@RonShamgar) April 21, 2021
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Redbubble share price trade-off
There’s good and bad with today’s announcement. Obviously, the bad news is the Redbubble share price is bleeding out. The concern of increased competition and higher customer acquisition costs could be another.
On the flip side, longer-term it could be a good move for shareholders. If management is able to deliver on their ‘aspirations’ additional shareholder value would be created.
Redbubble indicated the investments will be focused on growing headcount, increasing marketing, and improving its marketplace technology.
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More reading
- Why AMP, Challenger, Pilbara Minerals, & Redbubble shares are tumbling lower
- ASX 200 up 0.2%: AMP sinks, Redbubble crashes, Megaport jumps
- Redbubble (ASX:RBL) share price crashes 12% on Q3 update
- 5 things to watch on the ASX 200 on Monday
- Why the Redbubble (ASX:RBL) share price could charge higher today
Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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