|Shares Out. (in M):||260||P/E||0||0|
|Market Cap (in $M):||317||P/FCF||0||0|
|Net Debt (in $M):||0||EBIT||0||0|
A number of catalysts are set to hit Redbubble in CY 4Q19 including a US ADR, rapid revenue growth, further improvement in profitability, and a nutty valuation about 1/6th of peer group. Redbubble is a 21st century retailer that is grew revenue at +34% a year, content at +40%, and customers at +35% yet trades at extremely low valuation of 0.9x sales and 3x ev/gross profit. RBL/TeePublic now have about 3x the market share of the next closest competitor such as Threadless, Spreadshirt, Zazzle, Society6, (using a mosaic of Google trends, S6 actual revenue, Apple Ios rankings [none of the competitors have much of a app/mobile that we can find, RBL has $116 million mobile/app biz], and industry conversations). Redbubble/TeePublic operate in marketplace model with a winner take most industry structure (no different than eBay, Etsy, etc). We think RBL is where ETSY was in 2015-16 re; revenue/profits (except w/ great management). Since 2015, ETSY historically has been valued at 2.3-11x sales. Recent IPO’s in two sided marketplaces such as FVRR, REAL, UBER, LYFT are valued at 6x+ revenue with significant losses vs. RBL has generated positive cash flow of $5.5 million as the business has grown 22x in revenue since 2012. RBL is now both growing rapidly and steady state profitable and trades at 1/6th industry valuation (as the company only trades in Australia until the US ADR this fall). Last year was a tough year for Redbubble given a Google algorithm change and acquisition of TeePublic. However, RBL has largely vindicated itself with TeePublic organic growth rate inside of RBL reaccelerating to 46% growth in most recent quarter, and a very organic growth trends that has allowed RBL to achieve profitability. OPEX as % of marketplace revenue have fallen from 34% to 25% since 2015 with gross margins expanding about 3%.
What is a 21st century retailer?
Redbubble dodges all the risks of conventional retailers and is growing rapidly with good unit economics:
RBL Artists can upload a design and Consumer can order and have delivery within 3 days….most conventional apparel retailer supply chains from design to delivery in stores are 5-9 months. (designer/artists pick up nearly instantly on real time design trends)
RBL has 1 million artists/designers on their platform that have made 24 million designs/works of art (growing 40% per year)
RBL is a virtual business model and based on arbitrage: No inventory (yet never runs out of inventory, unlike ETSY), no square footage, no fulfillment, no design/fashion risk
RBL has the platform owners have a 30% take rate
RBL can seamlessly grow business by just adding new products into content library (marrying 24 million designs to any new product that RBL launches instantly creates a large combination of product)
Offline retailers have 40-50% product overlap Hanes T-Shirts or Fruit of the Loop Underwear vs. RBL 100% unique content library (mainly unique one of kind content)
RBL is targeting $280 billion in end markets and has 1% market share….Most markets are inning 1.
RBL covers 30 countries and growing (art/design spreads easily across borders/geography)
RBL sells over $100 million in T-Shirts alone each year.
We estimate RBL will pay about $100 million a year in royalties and operating profits to fulfillment partners and artists
RBL hidden asset is paying royalties of $70 million a year to the artist base, they promote and link back their artwork to Redbubble website which leads to net revenue/direct ad spend of 10x. Effective customer acquisition budget is really closer to $100 million a year because Artists get paid royalties when their art sells on RBL and they promote and tie back to RBL site.
RBL 60% of all purchases are at least 1 year or older on the site, effectively a good deal of art/design is evergreen content and easy to sell across geographies/countries.
RBL is highly efficient with revenue per employee of approximately $1 million.
RBL will likely grow product categories from 65 into the hundreds overtime (socks, pants, shorts, handbags, swimsuits, napkins, shoes, bras, …etc) ….see https://www.kornit.com/applications/ many of Redbubble fulfillment partners use these machines.
RBL is in process of bringing on board 1,000 licenses now (they have 50, with 350K works of art over the last couple months, which sell 3-4x as well as other work on the site)
RBL per capita spend in US is approximately .40 cents and other 20 countries it is around .10-.25 cents. Urban Outfitter (URBN) has per capita spend of about $10 in US and online about $3.00. RBL is targeting far larger end markets than URBN.
I am sure they will be able to make each of these new categories big if/when they get into the market simply based on massive traffic+24 million designs that instantly go onto to any new product
Market realizes the value of: Retailers have 40-50% product overlap (Hanes, fruit of the loom etc), theme of supporting small artists, unique self-expression w/ many one of kind designs, affordable prices. URBN has $10 per capita in US (offline/online spend) mainly in clothing….RBL is at around .30 in US and .10-.25 in other countries and covers 65 product categories with 24 million designs
RBL has a ton of growth opportunities, which require very little capital to pursue and is effectively an arbitrage winner take most market.
Pure play competitors: Redbubble also owns TeePublic…indexing by traffic RBL+TeePublic have 86 and next closest competitor Zazzle at 32. I believe this excludes Mobile+App revenue which is $115 million business for RBL….w/o much of mobile or app for any of the competitors.
No Write up would be complete w/o highlighting the AMZN risk:
Amazon has been competing against Redbubble since inception 12 years ago. Amazon only competes in a) 3 product categories (t-shirts, hoodies, long sleeve t-shirts) b) re: fanart/partnerships AMZN only partners with brands that have over 100,000 followers c) T-shirts on AMZN are $19.99 to $29.99 (RBL has T-shirts down to the $17 and artists can set their own prices over set cost) d) for an Artist to join Amazon by Merch an artist needs to request an invitation then apply e) https://services.amazon.com/collab/merchcollab.html ….AMZN is not going to ignore a very large end market and we think there is plenty of opportunity given AMZN constraints for RBL to have an extremely large business over time.
Since 2012, RBL has generated in grown revenue 21x from $12 to $257 million and over this time period in aggregate generated positive $5.2 million on in operating cash flow. As a two sided marketplace RBL is since inception profitable (about 30-50% more profitable than UBER, LYFT, FVRR, REAL, etc) and a 30% take rate with 1 million artists and 5.4 million transactions last year. RBL now has 3-4x market share of its next closest competitor and blowing away the competition (RBL’s TeePublic last quarter had 46% organic growth rate vs. S6 -10%). RBL is a model that should have 10-15% operating margins with 25-40% growth for a long time to come. RBL has about $1 million in revenue per employee. I believe RBL is poised for a materially higher valuation in Oct-Dec 2019 as Redbubble begins to trade in the US with a coming ADR and a number of catalysts: rapid growth, profitability, new product launches, and an insanely low valuation for a very valuable business. If RBL was a private company or traded in the US we think the business would be worth at least 4x the current valuation or about $1 billion which is not crazy for a business with $400 million in revenue for the current year. Redbubble effectively now has 1 million designers working for them with 24 million designs which can be delivered to your house in 3-4 days on 65 and counting products. RBL will pay these artists/designers approximately $70 million in royalties this year (and will approach about $200 million in aggregate pay out since inception). RBL has become the dominant leader in the space and is 3-4x the size of the next closest competitor in winner take most market and should have around 7.5 million customer orders. On a market cap of $240 million, RBL will pay artists and fulfillment partners nearly $90 million in income this year (artists will make $70 million in royalties). RBL generates about 10x direct marketing spend to net revenue or 12x to gross revenue. This is due to the large artist community acting effectively as a sales force and promoting their artwork on social media and tying back to Redbubble’s site. Monthly active users on Redbubble Ios app has grown from 50K two years ago to 400K as of June 2019. RBL mobile app according to Apple Ios rankings has passed Urban Outfitters, Carvana, Dicks Sporting Goods, Ikea, Zara, Nordstrom, Costco, and Whole Foods (RBL updates Ios every two weeks and has a 4.85 out 5 rating NPS 68). Mobile + RBL app is about $115 million in revenue. Redbubble revenue has grown from $12 million in 2012 and will hit around $400 million in June 2020. Their next target is $1 billion. RBL is targeting $280 billion in end markets now with 65 products and has 1% market share (most products are in inning 1). Redbubble has crossed 1 million artists and 24 million designs which is about 3-4x the next closest competitor. Redbubble will list as a US ADR in CY 4Q19 and I believe this will be a major catalyst for a materially higher valuation. RBL EBITDA margins are about 30% higher than TheRealReal, similar growth rates, RBL transactions are about 4x higher around 5.4 million orders last year. RBL is growing by adding new products (60 likely going to 800-1000 over time), more per captia spend, Fan Art partnerships (added 50 in 6 months, artists have designed 350,000 pieces of work, and they sell 3-4x better, RBL announced they are in process of onboarding 1,000 brands now covering Sports, Music, TV/Entertainment, Gaming and more), in 30 countries now and adding South Korea and Japan next. There are many beautiful aspects to this business 35% take rate, designs are evergreen and attractive designs are agnostic to language and move seamlessly across countries/borders. The Redbubble model never runs out of inventory/product…yet carries zero inventory and has a supply chain from design to delivery of 3-4 days vs. 6-12 months for typical retailers (design, manufacture in Asia, ship back, carry inventory, miss design window, mark down inventory, etc….RBL has NONE of these risks). RBL model scales up and down extremely rapidly. In November of 2018, over 5 day “black Friday-cyber Monday” Redbubble model surged up to run rating nearly $800 million in annual revenue and RBL ships over 1 million orders alone in December. OPEX as % of marketplace revenue 35% in 2015 26% in 2019 combined with gross margins expanding from 34% to 37% while revenue I up 4x over this period. Finally, again it is quite crazy/nutty to find a retailer with blow out growth and profitability at 0.9x revenue and 3.5x EV/Gross Profit. In fairness the profitability that drops to the bottom line for RBL shareholders does not look “cheap” as of yet, but the goal like many marketplaces is a winner take 50-70% market share industry structure and RBL is focused on dominating this market with scale first and more substantial profits second. Its working, as RBL partners will make nearly $100 million a year off RBL now (Print fulfillment partners & Artists) with RBL valued at $297 million EV. I think in 3-4 RBL gets to $1 billion in revenue and generates $120 million in operating income or around .40 cents a share and second RBL would have a lot more cash per share….but definitely worth probably a 20x multiple given growth and margins. Look at spread between revenue growth and OPEX growth.
Revenue in millions & Operating cash flow:
2012A= $12 +$0.6K
2013A= $27.5 +$2.2K
2014A= $48.6 +$3.2k
2015A= $71.1 +$0.2K
2016A= $114.6 ($4.7K)
Redbubble acquires most of its traffic across platforms such as Google (struggle last year), and now focused on multiple channels like Instagram, Snapchat, Pinterest, FB, and Youtube.
Android app launching this fall.
The new CFO, Emma Clark is very good.
Why will growth continue at a very high rate for a very long time?
Value Creation: If RBL trades at 2x sales and adds over $100 million a year in revenue. Then $200 million or about .80 a share in value should be created on a $1.20 stock. If Redbubble ever got even 50% of peer group multiple around 3.5x sales or 8x ev/gross profit the stock would be worth around $4.00 a share or +233% return from $1.22.! If RBL ever got a UBER, ETSY, REAL, FVRR, or LYFT valuation the stock would be worth between $5.50-9 per share vs. $1.22. RBL is the only one besides ETSY that is actually profitable. Whatever the valuation it is certainly worth more than $1.22, given the company is inning 1 of growth across products, geographies, artists, offline, Asia, Bulk orders, and potentially offline stores. It is hard dispute the opportunities given the results. Why is 2.0x Ev/net revenue the right number, if RBL hits target margins of 10-15% which is believable given revenue is growing far faster than opex on $1bn in revenue this would be $125 million at a 15x multiple this would be $1.875 billion or about 1.9x sales (probably trade higher with 25% revenue growth). Basically 2.0x multiple of revenue is not crazy for rapid growth and profitability especially with a US listing coming. 2.0x this years revenue is plus cash is $2.67 or +118% from current prices.
New CFO Quotes July 30th earnings call:
“As we look ahead to the longer-term potential of the group, we believe that the company is significantly undervalued compared to the likes of Etsy. This has become even more profound with the space of recent listing to the U.S. such as REVOLVE, Farfetch, The RealReal and Fiverr. These are online marketplaces and e-commerce players which command significant multiples compared to the Redbubble Group. One of the ways we will address this gap is we plan to launch an ADR program, and we will provide details on that in due course/” (what he left out is RBL is profitable and most of the others except ETSY are not)
“Moving on to the operational metrics for FY '19. The most important thing to state about these sets of data is that all metrics for all 3 sides of the Marketplace remain very, very healthy. We have a growing content library and many more selling artists, which is ensuring more enriching content on the platform and contributing to a substantial competitive moat. We also have our iOS app helping propel mobile growth. This shows no sign of slowing and will be further assisted by the launch of the Android app, which is currently under development”
RBL CEO July 30th:
“As I currently see it, we have a clear line of sight to sustained growth on TeePublic and a return to healthy growth rates in Redbubble. Our current economics demonstrate that this growth can be achieved profitably.”
This revolution is powered by 3 forces that have been building in retail commerce. First, the [ gate ] economy that has brought hundreds of thousands of artists to Redbubble and TeePublic to monetize their artistic content with no financial risk or operational hassle. Second, on-demand technologies that allow us to leverage our huge longtail content library to make and deliver personalized quality, affordable products at the same standard as traditional retail. And finally, global consumers who want more personal retail experience that enables self-expression rather than mass-market [ sameness ] . We are a much bigger market play than most people appreciate. The Marketplace model extend into a wide array of consumer product markets. We can access these markets as we scale up, build our brand and consumers realize that they don't need to compromise on personalization, quality, speed and affordability. We deliver a great experience that is differentiated and becoming more so. We are uniquely positioned to win as we are a flywheel business that is hard to replicate. Our strategy aims to solidify this advantage.
Current Investor Presentation:
(July 30th earnings release)
Business Update RB Group is making progress in areas of strategic investment that are critical to long term marketplace growth and profitability.
For the Redbubble business, key initiatives are starting to power the business:
● Artists: Product Revenue from authentic sellers at Redbubble grew by 39% in FY2019 and now 6 7 represent 76% of Redbubble Product Revenue
● Membership: During FY2019, Marketplace Revenue from members grew by 109%, being 29% 8 of Redbubble Marketplace Revenue, and there were 5.7 million active members on Redbubble 3 Gross Profit as % of Gross Transaction Value. 4 FY19 figures include capital raised for the purchase of TeePublic, and not yet paid as the terms included a deferred consideration amount. 5 Aggregate operating and investing cash flow, and FY19 figures exclude consideration for TeePublic. 6 Does not include shipping income. 7 Defined as those artists that tend to upload high quality, original works which resonate well with customers. Data Science work during 2018 has helped identify this critical segment at Redbubble and significant development investment has been focused on increasing the output of this group. TeePublic’s artists are yet to be segmented. 8Marketplace Revenue from Members comes from Redbubble only and contribution is measured on a Redbubble basis only.
● Mobile App: Redbubble iOS app saw growth in Marketplace Revenue of 140% in FY2019 and work is underway on the development of an Android app. In 4Q, the iOS app represented 8% of Redbubble Marketplace Revenue ● Branded Marketing: A strengthening brand is allowing a shift of spend to lower cost channels e.g. direct and branded search. RB Group 4Q marketing spend was only 9.7% of Marketplace Revenue
● Content Partners: RB Group has on-boarded a total of 48 brands, added 25 new brands in 4Q, and the volume of licensed content grew to 350,000, up 46% QoQ
● New Products: 5 new products (throw blankets, bathmats, shower curtains, glossy and transparent stickers) were launched in 4Q, after the completion of replatforming work enabling efficient and faster new product launches
● Fulfillment: Continued to reduce fulfilment costs while increasing customer NPS by 3 points to 68 which is an excellent score
● Operating Costs: Redbubble operating expenses grew by only 12% in FY2019, achieved by management spending discipline For the TeePublic business, significant progress has been made across the following aspects:
● Paid Marketing: Grew and scaled efficiently across paid channels, particularly Google Shopping
● Content Partners: Built core process for fan art and onboarded first brands, including Star Trek
● Europe: Expanded fulfilment network and enhancing market coverage via localization
● Supply Chain Improvements: Enabled additional US fulfillment and migrated to faster, lower cost shipping service
● Improving Margins: Leveraged Group scale to achieve improved fulfilment costs and sharing insights on pricing and promotions
DISCLAIMER: This does not constitute a recommendation to buy or sell this stock. We own shares of the company, and we may buy shares or sell shares at any time.