The Temple & Webster Group Ltd (ASX: TPW) share price has dropped by 24% since the start of the year. It's down 44% from the end of August 2021.
However, if investors didn't look at the share price and just read the latest business result, they would see a business that continues to grow quickly.
Multiple brokers think that Temple & Webster shares are worth considerably more than they're currently trading.
Taking into account the current Temple & Webster share price as well as the report it just released, brokers like Credit Suisse, UBS and Morgan Stanley all rate it as a buy with price targets that imply potential upsides of at least 40% over the next 12 months.
What's to like about the e-commerce ASX share? Here are three reasons:
Fast sales growth
All of the brokers recognise that the retailer's sales continue to grow year after year at a good double-digit pace.
In the first six months of FY22, revenue increased 46% year on year. It was up 218% compared to FY20. Revenue per active customer increased by 10%, which was the sixth consecutive quarter of growth. The trade and commercial division grew revenue by 49%.
Part of the strategy to grow revenue is to spend heavily on marketing to drive both sales and brand awareness. The brand awareness increased to 61%, with the marketing return on investment (ROI) holding above the company's target levels.
Management noted that strong supply chain diversity (both drop-ship by suppliers and private label) has enabled a consistent trading performance through this COVID era.
Growth has continued into the second half of FY22. For the period of 1 January 2022 to 6 February 2022, revenue was up 26% year on year and showed a rise of 161% against FY20.
Growing revenue and scale can help in a number of ways including more money for re-investment, better unit economics and improving the consumer proposition. This could be key for helping the Temple & Webster share price over the long-term.
Management say that they are confident that the Temple & Webster strategy is resonating with the next generation of shopper and that it's well placed to continue to take share in the markets it's operating in.
Exposed to strong tailwinds
Temple & Webster says that its core business-to-consumer (B2C) furniture and homewares category is a market worth $16 billion, undergoing a structural shift towards online.
The company points out that the Australian percentage of online penetration of the furniture and homewares market increased from 5.1% in 2019 to between 7% to 9% in 2020. In the US, the online percentage of the category has reached around 25.3% (which rose from 15.2% in 2019). Temple & Webster is suggesting that in the medium-term, Australia is heading towards that level of adoption.
Less than 5% of the 'home improvement' market is online. The types of products in this category are tools and equipment, garden and landscaping, paint and supplies, window furnishings, flooring, plumbing fixtures and so on. Temple & Webster has expanded into this area recently.
The company wants to have the biggest and best range. Technology (like AI and 3D/augmented reality) and strong customer service are helping increase the conversion rate.
Good value
Analysts and brokers will often estimate what they think is a fair value for a business, or where they think the Temple & Webster share price will be in a year from now (called a price target).
As mentioned at the start of the article, a few brokers have significantly higher target prices.
UBS has a price target of $11.80. Credit Suisse has a price target of $13.54. Morgan Stanley has a price target of $14.
Morgan Stanley thinks that Temple & Webster can continue to benefit from the adoption of e-commerce and that in the next four or five years it can reach $1 billion of revenue.
