Is the Redbubble (ASX:RBL) share price an obvious buy?

The Redbubble Ltd (ASX:RBL) share price has been falling recently, is it an obvious buy? Broker Morgans has had its say.

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The Redbubble Ltd (ASX: RBL) share price has fallen another 5% today.

Redbubble shares have actually dropped by 43% over the last three months. It has actually seen a bit more of a drop if you go back further – it's down 46% since 25 January 2021.

Redbubble is a business that owns two websites, Redbubble and TeePublic, where artists can sell designs that are then printed onto blank products by third parties. Some of those products include apparel, stationery, housewares, bags, wall art and so on.

What caused the Redbubble share price selloff?

Redbubble recently gave its trading update for the third quarter of FY21.

The numbers that Redbubble revealed showed a lot of growth. Marketplace revenue – which is total revenue less money paid to artists – increased by 54% to $103.4 million. Gross profit grew slightly quicker, by 55% to $39.8 million. That saw the gross profit margin improve from 38.3% to 38.4%.

Operating expenses only went up 3%. This helped earnings before interest, tax, depreciation and amortisation (EBITDA) increase by $8.5 million, going from a loss of $6.3 million to a profit of $2.2 million. Earnings before interest and tax (EBIT) grew 91% to a loss of $0.9 million.

Redbubble is a seasonal business, so it helped investors get a clearer picture of performance by including its performance for the nine months to March 2021. Marketplace revenue was up 85% to $456 million. Gross profit was up 100% to $184 million. EBIT wen up $53 million to $41 million. Operating cashflow was up $48 million to $54 million.

It was the new strategy that caught investor attention negatively.

The new strategy

Management are confident about the long-term future of Redbubble, with a boast that no other platform in the world combines the breadth of artist-generated designs with their availability on a wide range of made-on-demand consumer products.

Redbubble also pointed to a huge addressable consumer good market. E-commerce spending for the current range of products sold on Redbubble Group marketplaces was estimated at over $300 billion in its core geographies and $700 billion globally. This is predicted to grow to more than $1 trillion by 2024. Within these markets, 35% to 40% of customers are already seeking a product that is unique and meaningful.

Management said it's uniquely positioned with this growing market segment.

Redbubble sees a tremendous opportunity to grow and scale the business.

It has decided to drive revenue growth first and foremost. Its medium-term goal is to reach gross transaction value of more than $1.5 billion, with revenue paid to artists of $250 million, leading to marketplace revenue of $1.25 billion per annum.

That will mean that the EBITDA margin is expected to be in the mid single digits during this growth phase. Despite all of the growth investing, it's going to maintain positive EBITDA.

Once it reaches $1.25 billion of marketplace revenue, around 2024, Redbubble believes that it will have a gross profit margin of between 40% to 42% and an EBITDA margin of between 10% to 15%.

Is the Redbubble share price a buy?

Broker Morgans recently downgraded its rating on Redbubble from buy to hold, with a price target of $4.88. That was because of the short-term profitability hit. However, the broker is still attractive to the long-term growth prospects.

Redbubble is now facing a hard time to generate strong growth from last year when there was strong online sales as well as a lot of mask sales. The broker thinks the ASX share can improve customer repeat buying.

The broker also noted that Redbubble is suggesting higher revenue growth over the next few years than what Morgans was expecting.

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