3 reasons why the Temple & Webster (ASX:TPW) share price could be a top buy

Temple & Webster shares could be worth considering.

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The Temple & Webster Group Ltd (ASX: TPW) share price could be worth considering at the moment.

This e-commerce player may have a lot of potential and it could be worth considering for the long-term.

COVID-19 has really dialled things up for the online retail sector. Temple & Webster is trying to take advantage of the increase in demand. It’s succeeding at generating more volume and growth.

Here are three good reasons to consider the Temple & Webster share price:

Rapidly growing

A business that is rapidly growing each has the ability to deliver good total growth after a years thanks to the power of compounding.

Businesses that are scalable, like online retail, can really drive profit higher if revenue is increasing at a nice rate.

FY20 saw revenue growth of 74% to $176.3 million. FY21 revenue went up 85% to $326.3 million. In a trading update for the first two months of FY22, revenue had grown by another 49%.

FY21 showed how profitable the business can be, despite the high level of investing it’s doing for growth. Earnings before interest, tax, depreciation and amortisation (EBITDA) rose 141% to $20.5 million, whilst ‘normalised’ net profit was 165% higher to $14 million.

Temple & Webster continues to look for new ways to increase and diversify its earnings. Business customers are a growing part of the picture. The trade and commercial division saw revenue growth of 110% year on year.

The Temple & Webster share price could be significantly influenced by how much it grows its revenue and profit over the coming years.

Big addressable market

Temple & Webster says that it’s operating in a large $16 billion market, with less than 9% sold online. This excludes the business to business market, which Temple & Webster does have a growing presence in.

At the end of FY21, it had 778,000 active customers – this was an increase of 62% year on year.

The business has a growing range of products on offer. It has around 210,000 products from more than 500 suppliers across 210 categories. Around 74% of this is operated through a ‘drop ship’ model, where the supplier sends the product directly to the customer. This comes with no inventory risk.

Its operating model allows it to have a negative working capital model. This way, it can leverage third party warehouses and carrier networks. The average time to dispatch is 1.9 days.

Investing to capture the opportunity

Temple & Webster is investing in a number of areas to increase its revenue and its long-term profit margins.

For example, it’s investing in its private label offering, which offers diversification of supply, less dependency on the drop ship network, improved margins, stock assurance and speed of dispatch.

It’s investing in its app so that it’s the leading offering and can drive higher levels of engagement, plus repeat purchasing.

Temple & Webster is also looking to merge the online and offline experience with its augmented reality offering so that customers can see the products in their room. This can remove barriers in the online shopping journey and increase conversion.

The company is also investing in an AI interior design service, suggesting products to match a customer’s selected item. The next version will be 3D generated life-like rooms. These types of things also drive the conversion rate and average order values.

Market capitalisation snapshot

At the current Temple & Webster share price, it has a market capitalisation of $1.45 billion, according to the ASX.

Should you invest $1,000 in Temple & Webster right now?

Before you consider Temple & Webster, you'll want to hear this.

Motley Fool Investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and Temple & Webster wasn't one of them.

The online investing service he’s run for nearly a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.* And right now, Scott thinks there are 5 stocks that are better buys.

*Returns as of August 16th 2021

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Temple & Webster Group Ltd. The Motley Fool Australia has recommended Temple & Webster Group Ltd. 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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