One fund sold off all its Redbubble Ltd (ASX: RBL) shares, but the portfolio manager has admitted it could be time to buy again with the stock heavily discounted.
Shares for the artwork merchandise marketplace had been as high as $7.35 in the past year, as a major beneficiary of the COVID-19 e-commerce boom.
But Redbubble shares sit at $3.34 at the time of writing — a 44% drop since its April financial update.
The Montgomery Fund revealed last week that it had completely exited its position just before that cliff.
Portfolio manager Joseph Kim recalled his team started worrying that the earnings would slow down for 2 reasons.
First was the decline in face mask sales.
“After peaking at ~25% of revenue in July, we assessed facemasks had declined to ~5 to 7% of revenue exiting December,” Kim wrote on a company blog.
“This has a significant impact not only for Redbubble’s revenue for March, but also the difficulty in ‘comping’ elevated face-masks sales that were unlikely to be repeated in the September quarter 2021.”
The second tailwind was the impact of currency exchange on Redbubble’s revenue growth.
“With more than 70% of Redbubble’s revenue from North America and the strength of the AUD vs USD, this represented ~15% headwind to its top line versus the prior comparative period, which we assessed had yet to be fully factored in market earnings estimates.”
Redbubble is a better business now than before COVID-19
Now that the market has hammered the stock, Kim thinks it could be time to consider Redbubble as an opportunity once again.
“Many of the aspects which initially attracted us to the Redbubble business – the flywheel, operating leverage, investment in supply chains, global reach and aspirations – remain intact,” he said.
“There is also increased awareness of the Redbubble brand given the spike in website viewer traffic and new customers acquired during COVID.”
The recent correction to its share price was more savage than Kim’s team had anticipated.
“With incremental new future sales targets, earnings and profit margins and investment focus areas, it may be worth re-assessing the shares once again as an investment opportunity.”
Regardless of the earnings risks, he said the business is clearly “much more valuable” in the post-COVID world than before.
“And should new CEO Michael Ilczynski and the Redbubble team start delivering on its aspirational targets, [it] will likely become more valuable over time.”