August was a volatile month for the Redbubble Ltd (ASX: RBL) share price. However, that wasn’t enough to deter one private investment company from remaining bullish on the ASX-listed online marketplace.
For EGP Capital, the medium-term prospects look favourable for Redbubble shareholders. This might explain why the e-commerce company appears as the fund’s fourth-largest holding in its EGP Concentrated Value Fund (as of 31 August 2021).
Let’s take a look at what’s behind the fund’s optimism towards Redbubble.
Potential upside for the Redbubble share price
Coming off a disappointing month in July, the EGP Concentrated Value Fund delivered a return of 6.7% during August. This exceeded the 2.5% derived from the S&P/ASX 200 Index (ASX: XJO) over the same period.
A significant contributor to the impressive monthly performance was Redbubble. In fact, the global online marketplace for print-on-demand products experienced a 32.8% jump in its value over the month. As a result, the Redbubble share price finished the month at $4.33.
Although, before shareholders could enjoy the jump, they had to endure the fall. Ahead of the company’s full-year results for FY21, the Redbubble share price fell nearly 14%.
Despite these fluctuations, EGP’s fund remains positive on the potential that Redbubble offers its investors. Speaking to this, EGP Capital chief investment officer Tony Hansen wrote:
I remain very positive about the medium-term prospects of RBL, now that the marketplace has reached scale, the key decisions are around how to deploy cashflows in search of business optimisation. Each new time I hear CEO Mike Ilczynski discuss his strategy, I am more convinced he has a very clear vision for how best to position the business.
The 2024 targets the CEO has laid out would be very close to the “Near Perfect Execution” trajectory of our original piece, and if they can get anywhere near that target, the share price would be multiples of the current price, implying enormous market scepticism about the likelihood of achieving these goals.
Stacking up against peers
For instance, as pointed out by EGP Capital, Redbubble trades on a trailing enterprise value (EV) to earnings before interest, tax, depreciation, and amortisation (EBITDA) multiple of 20 times. In comparison, Etsy fetches a richer 55 times multiple.
Additionally, Hansen anticipates Redbubble will outpace Etsy’s organic growth in revenue and earnings over the next few years.
Similarly, Redbubble trades at less than 5 times EV to gross profit. Meanwhile, Etsy commands roughly a 16 times multiple.
The fund points out that Etsy could pay twice Redbubble’s valuation to acquire it, and it would still be worthwhile. As a consequence, EGP Capital considers potential acquisition being the biggest risk to the multibagger potential of the Redbubble share price.