3 reasons why the Redbubble share price could be a buy

Here are three reasons why the Redbubble Ltd (ASX:RBL) share price could be a buy, including its growing operating leverage.

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There are a few good reasons why the Redbubble Ltd (ASX: RBL) share price could be worth looking at. Both brokers and fund managers like the business.

What is Redbubble?

Redbubble is the parent company which owns both Redbubble.com and TeePublic.com. These two websites are leading global online portals to buy artist-designed products. Redbubble says that its community of 'passionate creatives' sell uncommon designs on high-quality, everyday products such as apparel, stationery, housewares, bags, wall art and so on.

One of the newest lines of products launched by Redbubble was masks, which has proven popular during this difficult period of the COVID-19 pandemic.

3 reasons why the Redbubble share price could be a buy

1: Platform effect

Redbubble benefits from the platform effect. One of the benefits is that as Redbubble gets bigger it can attract more artists and content onto the platform because there's more customers. With more artists, customers are more likely to go to Redbubble first to find what they're looking for with more product choice. The more artists and customers there are, the more profit Redbubble can make and invest more into its fulfilment and operations, making the proposition more attractive for artists and customers.

Joseph Kim, a portfolio manager from Montgomery Investment Management who likes Redbubble, explained the benefits of a platform:

"Redbubble's success is partly driven by the sustainability of its flywheel effect, whereby a growing community of artists fuel demand for better and more unique content. During a period of lockdown where independent artists are likely to find it more challenging to commercialise products, Redbubble has likely provided an outlet for artists to monetise their work. This has coincided with the e-commerce spike, helping to drive a significant uplift in sales.

"The opportunity set for Redbubble is compelling. The business already has a global presence with its main markets being North America and Europe. Should the company build a recognisable brand, the potential to be a global e-commerce marketplace for aspiring artists presents significant upside. Recent interest in both social and mainstream media point to growing brand awareness, which helps perpetuate the flywheel effects."

2: Revenue growth

Redbubble is a business that is growing revenue at a rapid pace. In FY20 the company saw marketplace revenue grow by 36%, or 29% in constant currency. In the fourth quarter of FY20, Redbubble's revenue went up 73% to $103 million.

In the first quarter of FY21 it generated marketplace revenue growth of 116% to $147.5 million. Excluding the positive adjustment relating to delivery times reverting back to more normalised levels, marketplace revenue (paid) grew by 98% to $139.3 million.

The Redbubble share price has risen 418% over the past year as the revenue exploded higher.

To continue the business' growth, Redbubble CEO Martin Hosking said at the time of the FY21 first quarter update: "The strategic priority for the group now is to ensure we extend the market leadership we have established. We intend to invest in the customer experience to improve loyalty and retention and ensure long-term higher levels of growth. The company has the resources to undertake the anticipated investments and margin structure to ensure it can do so while remaining profitable."

3: Profit margins

Redbubble is a business that continues to see profit margins rise as it benefits from operating leverage, which is one of the main things that broker Morgans likes.

When margins increase, it can lead to profit growing faster than revenue.

In FY20 revenue grew by 36%, gross profit increased by 42%, operating earnings before interest, tax, depreciation and amortisation (EBITDA) grew 141% to $15.3 million and actual EBITDA surged 358% to $5.1 million.

In the FY21 first quarter, marketplace revenue grew 116%, gross profit went up 149%, gross profit after paid acquisition (GPAPA) – meaning marketing – rose 156% and EBITDA rose 1,680% to $25.7 million. The growing operating leverage showed as operating expenses only grew 29% to $21.1 million.

In the first quarter Redbubble said the gross profit margin grew from 37.8% to 43.7% and the GPAPA margin improved from 28.2% to 33.5%.

Recent Redbubble share price movement

The Redbubble share price has fallen 8% since 10 February 2021.

This is the lowest Redbubble shares has been for over a month.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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