Why the Redbubble (ASX:RBL) share price sank 18% lower in April

The Redbubble Ltd (ASX:RBL) share price was sold off in April. Here’s why the ecommerce company’s shares sank 18% lower…

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The Redbubble Ltd (ASX: RBL) share price was well and truly out of form in April.

The ecommerce company’s shares dropped 18.2% over the 30 days.

This means the Redbubble share price is now down almost 26% since the start of the year.

Why did the Redbubble share price crash lower in April?

The Redbubble share price was sold off last month following the release of its third quarter update.

Although the company’s top line continues to grow strongly, its lack of earnings growth spooked investors.

According to the release, for the three months ended 31 March, gross transaction value increased 58% (79% in constant currency) to $134 million and marketplace revenue rose 54% (76% in constant currency) to $103 million.

However, from this, it only reported earnings before interest, tax, depreciation and amortisation (EBITDA) of $2.2 million. This compares to its first half EBITDA of $48.8 million, which averages out to $24.4 million per quarter.

This was driven by management’s decision to sacrifice profit margins over the coming years to deliver its medium term aspirational marketplace revenue of $1.5 billion.

Is this a buying opportunity?

The market doesn’t appear overly convinced by management’s decision, nor do brokers.

One of those is Morgans. In response to the company’s update, the broker downgraded Redbubble’s shares to a hold rating and cut the price target on them to $4.88 from $6.64.

Though, with the Redbubble share price now trading at $4.10, this price target still implies potential upside of 19%. Which certainly isn’t bad for a hold rating.

Morgans notes that management’s aspirational target implies growth rates well above those that its analysts currently are factoring in. This appears to hint that Morgans is somewhat sceptical that Redbubble will be able to deliver on these targets.

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Motley Fool contributor James Mickleboro 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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