Description

Redbubble has grown revenue organically 16x since 2012 and has a 5 year cagr growth rate of +40%. The  former head of Consumer Products at DreamWorks: “Redbubble is like a superhighway that can take brands directly to some of their most passionate fans. Licensors can use the marketplace to increase loyalty, manage their fan-generated content on the web, execute instant promotions to a wide base of people already enthusiastic about their brand, and more. “

So what do ETSY, eBay, Match, and Redbubble have in common? They are all at-scale two sided networks that are hard to replicate as they gained size:

a) these businesses winner take a lot market structures lead to 40-50% market share or more.

b) with enough scale a number #4, #5, or #6 player is not needed

c) it is very hard to scale a two sided network; from the standpoint of balance between content, functionality of tech platform, and consumer transactions.

When they work there is usually a long runway ahead. The underlying unit economics are compounding out at very impressive levels and revenue growth has re-accelerated over the last three quarters and we believe the stock is significantly undervalued as a rapidly scaling two sided network that trades at 1.2x this year’s revenue (Comps are in the 3-4x+ range and FarFetch (FTCH) that just came public this week is at 12x ev/sales). RBL is both growing rapidly and guided to full fiscal year profitability. Redbubble mobile revenue over the last 3 years has grown from zero to $90 million with +62% growth in 4Q18 (June year-end) with a +18.5% improvement on conversion rates and nearly 40% of revenue. Nearly every part of the Redbubble fly wheel is compelling and scaling rapidly on the back of a sophisticated technology platform.  The company is a very asset light model has fixed asset turnover of 63x, total liabilities of $27 million, average cash conversion cycle of -35-40 days, and $21 million in net cash, and this balance sheet will support a company with $300 million GTV/$240 million net sales for June 2019 with north of 30%+ revenue growth.

Redbubble is quite similar to ETSY with a couple exceptions: with ETSY the artists fulfill/create the work of art while Redbubble allows 700,000 artists to upload 17.6 million designs to be printed on 66 products+ by 34 fulfillment centers and sold in 28 countries, hence RBL does all the work. RBL take rate is 35-40% of the sale, while the artist gets 20% and the fulfillment partner gets 35-40%. ETSY did 35 million transactions while RBL did 4 million and ETSY has about 2 million artists to RBL’s 700K. ETSY is valued at 9.5x sales and RBL is valued at 1.2x sales. ETSY has 20% EBITDA margins and RBL is aggressively investing for growth (but ex-growth bets targeting 10%+ operating margins). We believe Redbubble has many levers to pull to sustain very high revenue growth for a long time to come based on: artist/design growth compounded with new product categories compounded by increased Consumption. Redbubble has guided to positive cash flow/EBITDA with guidance of better than 30% organic revenue growth. We believe the only reason the stock is undervalued is the company trades in Australia (despite 92% of the revenue from US/Europe). We believe there a number of catalysts coming shortly: in October, CEO is coming to meet with investors in both NYC and SF the week following earnings. From 2001-2011 AMZN averaged 30% revenue growth 5% EBITDA margins and traded between 2-3x ev/sales. I think RBL could trade in the same 2-3x sales range vs. the current 1.2x ev/sales with similar revenue growth and 5-10% EBITDA margins. From our estimates RBL is outgrowing the industry by at least 100% or more in terms of revenue growth and a number of other metrics (see below). Even Kornit (krnt), one of the capital equipment makers and a hardware business used by Redbubble’s fulfillment partners which is growing at -7% slower than RBL with less than half the of the revenue of RBL trades at 5.5x sales. We think RBL can sustain 30-40% revenue growth for 3-5 years looking forward, the CEO did a presentation right before the quiet period and feel they are extremely well positioned going forward….as you can tell from the July 2018 conference call below.

July 24th 2018 Earnings Call, Redbubble founder Martin Hosking:

“Clearly the Company is in an exceptionally strong position as we move into financial year 2019, with growth rates above 30%, low customer acquisition costs, solid margins, exceptional mobile performance and healthy marketplace dynamics. Next year will be a watershed year for the Company as we look to deliver operating EBITDA profitability based on demonstrated momentum.

When I look at the Company, I see an organisation with an amazing capacity. At its core, I consider Redbubble a purpose-driven technology company. Technology is at the heart of what we do, but it is to serve a purpose. Our investments in innovative tech solutions, from machine learning to open platforms, are driving enormous gains. Barry will speak more about this, but at the highest level, I do not believe that there are any more innovative companies of our size in Australia and indeed, few in the world. The fact that we have so successfully written the move to mobile, to geographic and product expansion and to social media over the last eight years, all follow from our commitment to innovation.

The net result of these innovations is that Redbubble is an increasingly differentiated and compelling consumer and arts experience in all aspects. Redbubble is becoming a more important destination for more people doing more things, both consumers and artists. The competitive advantage we're opening up with this experience will only get wider as we build more competency across all these dimensions. Looking to the future, it is easy to see Redbubble is a major global brand and regular destination for vast numbers of people, the like of which Australia has not seen before. “ (my underline)

While Martin’s comments may sound promotional, the company has delivered in a big way. Management is very focused on a flywheel of revenue growth/scale.

Where and why is Redbubble winning? A deeper look shows that nearly every key metric of a rapidly scaling network is steadily tilting in their favor as the business grows. Here are some highlights:

• Redbubble should pay out to independent artists $60 million for year ended June 2019 (highest we can find in the industry) this payout is growing at revenue rate of over 30%.

• Redbubble has never paid an artist acquisition cost and have 17.6 million designs on RBL platform from 700,000+ artists

• Redbubble’s paid customer acquisition cost is 6% of sales and profitable on first purchase

• The low customer acquisition  is in part by having 17.6 million designs which index very well on Google and artists promote their own work on social media on top of RBL’s own marketing. 60-65% of the traffic comes for free. Regarding indexing, Google “iphone cases” and Redbubble is in top 5 organic searches.

• In speaking with the company, they estimate there are around 55-60 million independent artists globally of which rbl has about 3% or 700,000 artists from 238 countries.

• Top 20% of Artists on Redbubble will earn around $45 million out of the $60 million paid out, yet no single work of art/design is over 0.2% of sales and total unique designs sold were 1.6 million different designs in 2018

• Redbubble growth last 5 years: Artists on platform increased 4.8x, Customers increased 4.0x, Production/Fulfillment 5.6x

• RBL revenue should continue to grow 30-40%+ for a long time to come

• Sell side analysts have Redbubble’s gross transaction revenue at $300 million and net revenue $240 million for year end June 2019.

• RBL traffic 128 million desktop visits (+28%) and 140 million visits on mobile (+40%) in 2018

• RBL in less than 3 years has mobile revenue to $90 million with +57% revenue growth in 2018.

• 4Q18A Mobile revenue grew +62% and conversion improved +18.5%.

• Redbubble has significant business model advantages: no inventory (never runs out), no A/R risk, no design risks, no fulfillment/supply chain risks, with the added benefit of a mini-float of 30-40 days (negative cash conversion cycle)

• Given few constraints RBL marketplace can spike quickly: 5 day Black Friday Nov 2017 period: 200K orders purchases from 83,600 different artists and RBL earned $1.5 million over operating income (effective annualized revenue would jump to $750 million)

• Redbubble aggregate cash burn in scaling from $12.5 to $180 million through 2012-2017 was just $700,000 in negative cash from operations, and guided to generating cash flow going forward

• Redbubble has expanded globally with offices in Melbourne, San Francisco, Berlin and a team of 225

• Customer demographics: 13% of customers under 18, 52% 18-35, 35% over 35 years old (if you have kids under 12-21 ask them if they have heard of Redbubble)

• Per capita spend is less than .45 cents in nearly every country, Urban Outfitters has $10.00 per capita spend in US. RBL has many times the unique content than URBN (17.6 million designs on 66 different products)

• 81% buy because they like to be different, 28% bought as a gift.

• RBL Europe is growing +55-90% depending on country

• An artist can upload a design to customer delivery in 3-4 business days, 2 years ago RBL saw in Australia a 20 point jump in Net Promotor Score by reducing shipping days from 9 to 3.

• Designs/Art are evergreen content: 60% of the works sold are a year or older and 9% are 4 years or older (a large library of content that has been uploaded by the artists is a competitive advantage as consumers have little time sensitivity).

• Repeat customers went up +3% to 42% in 2018.

• Fulfillment costs per unit have dropped 32% over the last 5 years.

• Other sources of traffic: From the less famous artists… Artist has Family/Friends effectively an installed base of buyers and bigger artists have social media followings of 100-20K+ where they link there new releases to their Redbubble page.

• RBL has 50 million items on Google Shopping

• Redbubble hired Jorie Waterman from Shutterfly/eBay who is very impressive, since she has joined the company revenue has re-accelerated each of the last 3 quarters (she join Sept 2017).

• Redbubble CEO: Bain/BCG and COO of Wikipedia.

• CEO Compensation: The majority of his compensation is tied to stock price performance over 4 years. If Redbubble’s share price fails to compound out at over +20% annualized returns he starts to lose bonus and under 10% annualized return of RBL stock NO bonus.

As the above bullet points prove out: Nearly all metrics in Redbubble’s flywheel by design are compounding out in Redbubble favor as scale increases, this is not surprising for a network effect based business. The one metric that could be better is more new products which should really increase going forward. Redbubble comp Society6 www.society6.com has added around 18 new products in 2018 to Redbubble’s 1-2.

Redbubble TV is worth watching to get a better feel on how the company works:

http://shareholders.redbubble.com/site/media/rbtv

Three big trends at play: 1) Social Media (everyone wants to be a star) or unique 2) Print on demand technology is really changing and will enormously expand what is possible: Furniture is now being rolled out and the cost curve to print is dropping dramatically making this a MUCH more profitable and disruptive industry 3) Maker brands (supporting smaller entrepreneurs)

Consumers are looking for mass customization in the social network era.  Redbubble is solving some of the big problems offline retailers are struggling with and are in inning 1. To contrast, everyone is familiar with the problems with typical retailers: top 12 retailers have about $75 billion in inventories, 1.5 billion sq feet, with and many with flat to no growth. Many retailers also sell the same items about a 40% overlap. The average retailer needs 6 months led times for their supply chains from design to delivered in stores, which leads to 17-20% of inventory being unsold and discounting to move other inventories typically require a 30-40% mark down from full price. The retailers that are winning either have a very large scale with a low cost structure or differentiated like Zara. Zara has incredibly short lead times in their supply chain. Redbubble can go from uploading a design to a product being delivered our your doorstep in 3-4 business days (one of the fastest supply chains in retail for original works of art). Redbubble faces none of the challenges of offline retailers.  1) Product doesn’t exist until it is paid for by the customer (then delivered in 3-4 days) 2) millions of unique designs without a design team 3) Evergreen content in designs 60% are at least a year old 4) No square footage 5) no inventory 6) very rapid growth 7) very low customer acquisition costs at 6% of revenue 8) Redbubble has a Net Promoter Score of 70

Products: have increased to 66 and RBL is adding 1 new product a quarter. Each new product line should be at least a $20-30+ million business within 3 years. Redbubble is targeting the $200 billion market across Homewares/Apparel/Consumer products. Regarding product expansion, comp Society6 (part of Leaf Group) recently launched Furniture category with selling prices of $400-500, about 10x their current average.  For examples see:

https://society6.com/coffee-table (these will be also sold B2B, to mass merchant retailers like Target, the gross margin is over 50%)

https://www.architecturaldigest.com/story/society6-furniture-launch

RBL is NOT similar to CafePress business model (PRSS) as PRSS. We think PRSS has little value as the company is largely stuck in the past from a strategy and technology perspective. PRSS -20% revenue decline, industry growing +15%, RBL guidance +30% organic revenue growth. PRSS is a manufacturing company with old tech platform and not a marketplace. RBL is designed and heavily investing in technology to gain a large scale competitive advantage and built out a two sided marketplace.

The user experience is quite good. Much of the content is truly unique as Redbubble has over 100,000 greeting cards: https://www.redbubble.com/+shop/greeting-cards?ref=global-nav-top

In their investor deck…the company breaks breakdown % of engineering resources allocated by year to major projects and outcomes. 30%: “find your thing”  30% “deeper relationships” 10% “global user acquisition” 30% “Increase Scale” see page 21 in most recent IR deck for results. Some highlights: increased Google shopping SKU’s 4x, 8 new fulfillment centers onboarded, New API for fulfillment partners, 31% growth in active members.  

Formula for growth is: Designs/Artists X Products X Consumption. All three of these variables are growing rapidly.

Valuation

Over the next year w think RBL should be worth close to $3.00+ and if the current growth trajectory continues over the next 5 years we think RBL will be a 4 bagger from the current share price or greater (and this is mainly w/o multiple expansion). Canaccord does the best job trading and covering the company and the analyst has a $2.20 price target (+40% from current prices).  The opportunity exists due to high insider ownership/limited float and an Australian listing (AU investors are more yld focused, RBL is unconventional as a public company).

Growth will continue including entering new countries. Over the next 2 years, Redbubble will likely expand to Brazil and Asia. Redbubble should ship about 6 million items in 2019 (June YE). I have met probably close to 15-20 employees at Redbubble, and will say the culture and team are impressive. Using the current trajectory with a 12% discount rate, with 33% compounded annual growth*, and increasing margins to 1-2% per year up to 10% over 5 years implies a price target of $4.40 vs. $1.55. Whatever numbers we use, it is much more than $1.55. Goldman Sachs/AU has $1.90 (started in June) target. , and over last 5 years about cash from operations neutral (despite expanding offices in SF/Berlin and entering Europe). With a valuation of 1.2x sales and near the highest growth in the peer group (30%+ revenue growth is guidance) with positive cash flow and arguably one of the best business models we think the IRR should at least be equal to the revenue growth rate of 30% especially with margin expansion to be significant as most of the fixed costs are built out (SF/Berlin). FTCH 12x ev/sales, ETSY 9x sales, KRNT 5.5x sales, W 2.3x (-$190 million in EBITDA) sales, LEAF 1.3x sales and Redbubble 1.2x sales (30%+ revenue growth and cash flow positive). We really like both Leaf and RBL. The Sell Side analyst at Craig Hallum values online marketplaces at 3.7x sales. Using all RBL comps we get a 4.0x average ev/sales and 3.0 median ev/sales. There are approximately 115 companies that have 5 year 30% or higher CAGR revenue growth rates. The average valuation is 4.0x sales and median is 3.4x. RBL has 40% 5 year CAGR and trades at 1.2x EV/Sales.

The CFO of ETSY was formerly the CFO of LEAF and knows the business well. ETSY is the artists fulfill/create their own products vs. RBL artists upload designs which are printed by third party fulfillment nearest the customer. ESTY and RBL could really accomplish a lot…. I believe it would be a no-brainer for ETSY to buy Redbubble. There are numerous synergies across the board.

Both RBL & ETSY have nearly identical revenue growth rates of low +30%. One significant difference is ETSY has 22% EBITDA margins and RBL is guiding for positive EBITDA. Redbubble implies Operating margins should be 10%+ as 55% of OPEX is for what they have now and 45% of OPEX is for aggressive growth bets (see slide 15 August investor deck).

Bear case:

assume: revenue grows at 20% (revenue slows by a third) for 4 years then drops to 10% (drops by 67%) vs. current 30%+ guidance

Assume: operating margins scale to 8% by 2023 (company stated 10% operating margins ex- growth today)

Discount rate of 12%

DCF $2.27 a share vs. $1.55 current price

Mid Case:

Assume 25% growth 2023 then 10% growth, same margins scaling to 8% by 2023, 12% discount rate:

DCF $2.70 a share vs. $1.55 current price

Bull case

Assume status quo: 32% revenue growth through 2023 then 20%, scale margins to 8% by 2022, 12% discount rate

DCF $3.99 a share vs. $1.55.

Its worth looking at the latest investor presentation from Kornit (KRNT) based in Israel as it relates to industry trends for Print on Demand with significantly declining costs (becoming more profitable for RBL fulfillment partners) and innovations that will allow a lot more products to come to market:

http://ir.kornit.com/phoenix.zhtml?c=253936&p=irol-irhome

Industry comments:

Kornit Digital earnings transcript excerpt, Feb 2017:

Joseph Eric Wolf

Okay. And then, there have been customers, like the Australian company, RedBubble, where there's a fulfillment model but they don't actually own the equipment. The equipment that's being used for fulfillment of that -- of their brand, is that one -- how do you follow that in terms of one customer? Do you view them as the customer? Or do you view each place that actually produces as a customer?

Gabi Seligsohn

Well, first of all, we like to look at both of them as customers, but to be very frank, the actual activity happens at the fulfillment partner, locations, of which we have several that are serving, for instance, RedBubble business in the U.S. and in Europe, right? So the day-to-day activity is with the customer that are the fulfillment places, the people that actually buy our equipment and utilize them for the benefit of, in this case, RedBubble. And the relationship with RedBubble is very important for us in order for us to accommodate the introduction of new applications and new capabilities. And it's been a very positive relationship in that sense because they have a very, very high level of commitment to the quality of what they print, because they represent mostly artists and they have a big commitment to depict the exact colors and exact images that are included in the artwork that they are actually printing on fabric.

Risks:

Artists infringe on brands. The in the terms of use for Artist the responsibility lies with the Artist. RBL polices for infringement as well as takes down any infringement when notified. The interesting dynamic is many brands are okay with artists using brand images as passionate fans are buying brands they care about. The CEO told me a story that Ford attorney’s called and said take down all Ford images, they called the team at Ford and the marketing department intervened and said keep it up. Redbubble has a legal team and brand licensing to convert potential infringement claims into brand licensing opportunities. We believe it will be difficult for RBL to lose too much in a lawsuit as the Pokemon case proved. The reason for this is that Redbubble will immediately take down any infringing content when notified, has aggressive disclosures in terms of use for artists to not infringe when listing work, and that the best selling design on RBL is about 0.2% of total revenue TTM $450K. Redbubble has hired a team to find best selling brands and cut partnerships with strong brands for the artists to use and pay the brands a licensing fee. Anything possible and RBL may be sued for more infringements, to win a big judgement flagrant disregard and written notice of cease and desist has to happen and be ignored for real damages to rack up. Pokemon sued Redbubble for trademark infringement, for a dollar in damages. Pokemon estimated they lost $44,555 in sales by Redbubble artists. Our opinion, is the numbers are very small, RBL has aggressive terms that says Artists that list infringement of trademarks will be held liable, and RBL takes down any content when they get a cease and desist letter. More recently Redbubble is freezing accounts of artist’s that are flagrant infringing on brands.  It’s small dollars and very hard to prove pure infringement and that Redbubble knowingly disregarded and purposefully infringed then the liability may also lie with the infringing artist. In the Pokemon, case Pokemon won $1 in damages.

Amazon: Redbubble has been competing against Amazon for over 10 years and being doing just fine. AMZN is really focused mainly on T-Shirts and has been CUTTING the artists margins.

For anyone interested on RBL: Canaccord is good at finding blocks  Jenny.mullineux@canaccord.com.au also Cantor trades as well.

Sources:

http://shareholders.redbubble.com/site/PDF/1258_0/Investorupdate

http://shareholders.redbubble.com/site/results-reports-presentations/investor-presentations

DISCLAIMER: This does not constitute a recommendation to buy or sell this stock. We own shares of the company, and we may buy shares or sell shares at any time.

Catalyst

October 23rd 1Q19 earnings will be released & Black Friday 5 day results in early December

Extremely attractive M&A target: Redbubble would be a no-brainer for ETSY to buy $6.6 billion market cap with $600 million in revenue vs. RBL $300 million GTV/$240 million net revenue with $285 million EV

Market realizes Redbubble is an industry leading platform with Redbubble 30-40% growth of a new sided platform (artists/consumers), generating positive cash flow, and revalues at a higher valuation 1.2x sales....and joins peers in the 3-4x range

Revenue grows north of 30%+: more products, more artists, more Cac/ad spend, more geographic expansion….and OPEX should grow around 2/3rd of revenue growth.

DCF suggests $4 vs. $1.55 on current trajectory (Slide 15 10% operating margins ex-growth bets, and model roll out should continue at a 30%+ growth rates)….1.2x ev/sales is simply to cheap for business model vs. Etsy 9.5x sales.