After surging to an all-time high of $14.05, shares in ASX furniture ecommerce company Temple & Webster Group Ltd (ASX:TPW) suffered a massive correction this week. Temple & Webster shares have plummeted almost 25% lower to $10.77 since the company's annual general meeting (AGM) on Wednesday. It joined a number of other COVID-19 market darlings, including tech companies Megaport Ltd (ASX:MP1) and Whispir Ltd (ASX:WSP), that have suffered big selloffs this week as short-term investors took some of their profits off the table.
What sparked the selloff?
It's hard to say what prompted the sharp decline in the Temple & Webster share price, as most news out of the AGM was positive. In his address to shareholders, company chair Stephen Heath touched on Temple & Webster's impressive FY20 achievements. These included record annual revenues of $176.3 million and 483% growth in earnings before interest, tax, depreciation and amortisation (EBITDA).
CEO Mark Coulter then gave a trading update for FY21. First quarter EBITDA came in at $8.6 million, which was already greater than the company's full year FY20 result. Revenue growth has been accelerating, with year-to-date revenues to October 19 up 138% against the prior comparative period.
There's not much in those statements to deter investors. Could some of Temple & Webster's forward-looking statements be overly optimistic? For example, the company assumes that COVID-19 lockdowns will create long-lasting structural changes in consumer behaviour. This may well be the case, but it's still difficult to predict exactly how buying habits will change once lockdown restrictions ease. Particularly over the second half of FY21 and beyond.
There is also the potential that, as the recession starts to bite, consumers will have less disposable income to spend on luxury items like homewares and furniture. Additionally, as other industries including domestic tourism open up again, people have more options on where they can spend their money. Companies like Temple & Webster and JB Hi-Fi Ltd (ASX:JBH), which has also enjoyed a bump in revenues during lockdowns, might start to see their sales decline.
Investors may also have seen what Stephen Heath, Mark Coulter and co-founder and director Conrad Yui have been doing with their holdings. All three have sold significant parcels of their own shares in Temple & Webster in recent months. When those with inside knowledge of the company start selling off their holdings, it generally sends a message to the market that the share price might be getting overvalued.
Is now a good time to buy?
With the share price now essentially back to where it was in early September, now could be a good time to pick up shares in a growing company at bargain prices. Temple & Webster was a surprise success story to emerge out of COVID-19, but the company's continued growth throughout the early stages of FY21 could signal that it still has plenty of gas left in the tank. Plus, the company ended FY20 with a strong balance sheet, consisting of almost $40 million in cash and nil debt.
There may be some lingering questions over how consumer behaviour will impact Temple & Webster's sales over the longer-term. But the company is putting itself in a strong enough financial position to meet those challenges. I think it's more likely the recent share price pullback has been driven by profit-taking from short-term investors, prompted in part by the actions of the company's own leadership team. However, I think this could present new investors with a rare opportunity to pick up shares in this growing company at a significant discount.
