The Redbubble Ltd (ASX: RBL) share price has been an exceptionally strong performer on Thursday.
At one stage today the ecommerce company's shares were up a massive 25% to a record high of $6.02.
In afternoon trade the Redbubble share price has given back a good portion of these gains but is still up a sizeable 8% to $5.20.
Why is the Redbubble share price on fire on Thursday?
Investors have been fighting to get hold of Redbubble's shares following the release of an impressive first quarter update.
That update revealed that Redbubble's strong growth has continued into FY 2021, with Marketplace Revenue growing 116% over the prior corresponding period to $147.5 million.
Pleasingly, margin expansion led to its gross profit growing at an even quicker rate of 149% to $64.5 million.
But perhaps best of all, was that Redbubble delivered first quarter earnings before interest and tax (EBIT) of $22.1 million. This compares to a loss before interest and tax of $1.5 million a year earlier.
How did this compare with expectations?
According to a note out of Goldman Sachs, Redbubble delivered quarterly revenue in line with its expectations.
It commented: "Marketplace revenue (product & shipping) for the Redbubble Group (Redbubble & TeePublic marketplaces) in 1Q21 was A$147.5mn, up 116% on pcp (+122% in cc.) and in line with our expectation of A$146.8mn."
One metric which is outpacing the broker's forecasts is its gross profit margin.
"Gross profit margin for Redbubble Group was 43.7% in 1Q21, versus 37.8% in 1Q20 and 41.6% in 4Q20. This is currently materially ahead of our FY21E expectation of 39.2%," Goldman explained.
This ultimately led to its EBIT margin also tracking significantly ahead of Goldman Sachs' expectations for a margin of 9.6% in FY 2021.
It said: "Redbubble Group 1Q21 operating EBIT was A$24.8mn, up from A$0.0mn in 1Q20. This excludes A$2.7mn in other income/ expenses in 1Q21. Operating EBIT margin was 16.8% (for context, 4Q20 was 4.7% and GSe FY21E 9.6%)."
Is Redbubble a buy?
While Goldman Sachs has retained its buy rating and $5.20 price target on its shares, I suspect it will revisit its valuation in the near term.
One thing the broker will no doubt be weighing up when reassessing its valuation is the sustainability of its margins, which are being positively impacted by heightened sales of fashionable face masks during the pandemic.
Goldman commented: "We would expect the market to focus on the sustainability of the strength on GP Margin and the contribution that face masks may be making to its revenues (noting that in its August update, face masks were around 28% of revenues in July)."
If it believes these strong margins are sustainable, I suspect a price target increase could be coming.
