The market has been merciless in punishing the Redbubble Ltd (ASX: RBL) share price after the company yesterday released a seemingly positive third-quarter update.
Slumping 17% by close of trade yesterday, the Redbubble share price is continuing to slide today and is trading at $4.11 at the time of writing, a further drop of 3%.
Despite a well-rounded update as far as key financial metrics are concerned, the market honed in on its weaker earnings before interest, tax, depreciation, and amortisation (EBITDA) margins and increased marketing spend.
Redbubble expects its EBITDA margins to decline from 9.5% to mid-single digits in the near term, while headcount and marketing expenses are expected to increase to drive customer acquisition.
The company was rapidly honing in on profitability, with an FY20 net loss of $8.8 million and 1H21 profit of $41 million. However, lower margins and increased expenses could temper its profit expectations.
Morgans weighs in on the Redbubble share price
Morgans explains that there's currently a cycle of tough comparisons to periods with COVID-19 tailwinds and "unlikely-to-be-repeated" supercharged sales.
US streaming giant Netflix Inc (NASDAQ: NFLX) is a prime example of what's happening. The US$225 billion giant tanked 7% on Tuesday after reporting only 4 million new subscribers had joined the platform compared to its expected 6 million.
In light of the current cycle, Morgans has downgraded Redbubble shares from add to hold with a target price cut from $6.64 to $4.88.
Despite the downgrade, Morgans believes its business model and long-term growth profile is still appealing. It commented that its investment into marketing plays into the large opportunity to increase customer loyalty and repeat purchase metrics.
Redbubble's update also cited aspirational goals by 2024, including more than doubling marketplace revenue and improving EBITDA margins to 10-15%. The targets imply a 20-30% compound annual growth rate (CAGR) for revenue, which was well above the broker's estimates.
Foolish takeaway
Increasing marketing investment and expenses at the cost of near-term earnings could be a necessary evil to drive long-term shareholder value.
While the Redbubble share price is trying to find a bottom after yesterday's steep 20% fall, Morgans remains positive on the company's long term prospects.
