3 key reasons why the Temple & Webster (ASX:TPW) share price is compelling

Temple & Webster shares are interesting for a number of reasons.

| More on:
living room with sofa, cushions and coffee table and decor items

Image source; Getty Images

There are a few key reasons why the Temple & Webster Group Ltd (ASX: TPW) share price could be a compelling ASX stock.

For the readers that haven’t heard of Temple & Webster before, it’s like the Amazon of Aussie furniture and furnishings, selling hundreds of thousands of products like home furniture, lighting, kitchen and table items, rugs, outdoor items and so on.

Plenty of analysts rate the business as a buy, including Morgan Stanley. The price target on Temple & Webster – where the broker thinks the Temple & Webster share price will be in a year – is $16. That’s almost 50% higher than today’s level.

Here are three important reasons why it’s an interesting potential opportunity:

Revenue growth and market position

Morgan Stanley says that it is possible that Temple & Webster can reach revenue of $1 billion in the next five or so years.

Temple & Webster is certainly taking large strides towards that number. In FY21 alone it saw revenue growth of 85% to $326.3 million. FY22 has seen a continuing of a high level of double digit growth. For the period of 1 July 2021 to 27 August 2021, revenue had increased by 49%.

Management say that the business will continue its reinvestment strategy, investing into growth areas of the business to grow its online market leadership position with the ultimate goal of becoming the largest retailer (online and offline) for furniture and homewares in the home market.

Temple & Webster is focused on strengthening its customer proposition, built around “having the biggest and best range of furniture and homewares, combined with inspirational content and a great customer service experience.”

Growth of its private label brand products is helping provide diversification of supply, improved margins, stock assurance and a quicker speed of dispatch.

Online shopping adoption

The online retailer says that it has a large addressable market with accelerating online adoption. Temple & Webster says that it is operating in a large $16 billion market (which excludes business to business), with less than 9% of that sold online. The growth of spending online could help the Temple & Webster share price over time.

Temple & Webster is seeing its customer numbers continue to rise quickly, In FY21, active customers rose 62% year on year.

The business expects to take a good proportion of customers turning to online retail, by executing on both its organic and ‘inorganic’ opportunities.

Millennials are now entering the core demographic of spending, which is between the ages of 35 to 65.

There are a number of other factors that can help growth including physical store closures, new consumer habits formed during COVID-19 lockdowns, new market entrants (like Amazon) speeding up e-commerce take-up and new technologies improving the experience and conversion of shopping online.

Operating model

Another factor that can assist the Temple & Webster share price over time could be its business model.

Increasing scale helps its operating leverage, allowing it to accelerate investment for future growth and take market share, which then continues that positive cycle. Better unit economics help the underlying profitability as it gets bigger. As it gets bigger, it can slow its investment in fixed costs.

Temple & Webster says that it has a capital light and cashflow positive business model. Around 74% of its sales are through a drop-ship model with suppliers, meaning there is no inventory risk. The company is also able to leverage third party warehouses and carrier networks. This gives the business leverage to fund re-investment activity to outgrow the market.

Over the longer-term, the business sees international expansion as the next horizon of growth.

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 over 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 January 13th 2022

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.

More on Technology Shares