The Redbubble Ltd (ASX: RBL) share price could be a good one to consider for the long-term for a few different reasons.
For readers that haven't heard of Redbubble before, it's an e-commerce business. It sells an array of products that have unique designs on them, that have been designed by independent artists.
Morgan Stanley is one of the brokers that currently rates Redbubble as a buy.
Here are three of the reasons to consider the ASX tech share:
Operating model
Redbubble has a goal of creating the world's largest marketplace for independent artists.
It's looking to deliver value to artists to inspire them to create more unique content. Scaling its network will improve the customer experience and unit economics.
Aside from winning new artists and users, whilst improving the process for them, there are two other areas it's focused on. One is focusing on a deeper understanding of customers and their behaviour to create more compelling experiences and increased customer loyalty. The company is also investing in additions and changes to the available product range from the third party fulfilment network to reinforce winning more customers.
As the business grows, it is expected to see benefits across the company. This could help the Redbubble share price.
Customer base
There are a number of aspects of the customer base (and its growth) that may make it attractive.
In FY21, it had 9.5 million unique customers, which was an increase of 40%. It also saw 67% growth in purchases from repeat customers, contributing 42% of marketplace revenue. Around 55% of sales came from mobile platforms, with 14% of Redbubble marketplace revenue coming from apps.
In FY19 it made $257 million from repeat purchases, in FY20 this increased to $139 million and then in FY21 it rose to $232 million.
The company is making a number of investments and moves to understand the customer better and improve the experience.
It's expanding its reach into social channels and improving audience targeting to drive advertising efficiency.
There is the potential for conversion gains shown in free shopping, or reduced shipping costs, and delivery date experiments. Redbubble noted it saw up to 40% conversion gains with free shipping.
Redbubble has been trying to increase its average order value (AOV). Buy now, pay later functionality may be helping, with early signs of up to 50% of AOV uplift from BNPL users.
Redbubble thinks it's operating in an addressable market that's worth around US$300 billion and could grow to US$400 billion by 2024.
Profit margins
Increasing profitability of the business over time could help the Redbubble share price.
Redbubble is planning to invest heavily over the next couple of years to capture the e-commerce opportunity.
However, the business points to a favourable working capital cycle and potentially growing profit margins as reasons why it has, and can have, good economics.
In the next few years, its gross profit margin can edge higher as it grows the product portfolio while maintaining similar margin structures.
However, it's expecting to reduce its operating expenditure, as a percentage of revenue, from 16.8% down to a range of between 12% to 15% from the 2024 calendar year onwards as it realises the scale efficiencies in its core systems and processes.
At the earnings before interest, tax, depreciation and amortisation (EBITDA) margin level, which was 9.5% in 2020, it's expecting to increase this to between 13% to 18% as it benefits from scale and top line growth.
Morgan Stanley believes that Redbubble has highly profitable unit economics.
In FY21, before its increased level of investing, it grew earnings before interest and tax to $39 million (from a loss of $9 million in FY20) after 58% growth of marketplace revenue to $553 million.
What is the Redbubble share price valuation?
The company isn't planning to make much profit over the next couple of financial years.
Using FY21's numbers, it's valued at 40x the net profit and 23x the operating cashflow.
However, Morgan Stanley has pencilled in an estimated profit for FY23. The broker thinks the Redbubble share price is valued at 75x FY23's estimated earnings.
