Redbubble to Burst Without Customer Loyalty

Australia | Dec 13 2021

This story features REDBUBBLE LIMITED. For more info SHARE ANALYSIS: RBL

The value for investors in online marketplace Redbubble remains in its ability to execute on strategy to reach revenue targets through improved customer retention.

-Analysts largely see value in Redbubble, but strategy execution is key to risk-reward
-Increasing repeat customer loyalty will be key to achieving targets
-Strong customer retention growth throughout covid is yet to prove resilient post-pandemic

By Danielle Austin

A declining share price in recent months has made Redbubble ((RBL)) an attractively valued prospect to analysts, but attractive pricing only offers value to investors if the company can execute on strategy to achieve medium-term scale targets.

Redbubble offers a distribution platform for independent artists to monetise their work, where Redbubble provides marketing, product fulfillment, third-party provided delivery, and customer service.

For investors, the value in Redbubble will be in its ability to meet medium-term scale targets of over $1.25bn in revenue with a 13-28% underlying earnings margin, which the company has guided to achieving beyond 2024.

Morgans sees vast room for improvement in Redbubble’s repeat customer metrics to drive revenue targets. The broker estimates a maximum 20% of the company’s customers are repeat purchasers, and compares this percentage to arguably best-in-market peer Etsy which boasts repeat purchasers counting for an approximate 50% of active customers. Morgan Stanley further commented that Etsy’s performance proves strong customer loyalty could be achieved.

Where Redbubble was tracking largely flat customer loyalty improvement pre-covid, the pandemic proved a significant growth period for the platform but the challenge now is to prove that strategy can continue to drive customer loyalty post-covid. Retaining customers will be key to achieving scale targets, but the company is yet to provide clear detail on how it intends to improve the metric.

Cycling strong comps in the first quarter

On releasing first quarter results in October, Redbubble reported a year-on-year marketplace revenue decline of -28%, off the back of a strong comparable period in the previous year. Morgans notes first quarter comparable sales were always going to be the toughest for the company, and Redbubble has now moved past peak cycle risk.

While achieving scale targets are key to all analyst recommendations, there are differing opinions on when the company will achieve these.

Morgan Stanley is Overweight rated with a target price of $6.50. Morgan Stanley analysts find the company’s medium-term revenue targets to be achievable, but dependent on the company improving customer loyalty.

Morgans is Add rated with a target price of $4.84. The broker continues to see value in Redbubble’s strategy and long-term growth but is yet to see evidence of its ability to improve customer loyalty.

UBS, which recently initiated on Redbubble, is Neutral rated with a target price of $3.45. The broker expects the company to achieve the $1.25bn scale revenue target in FY28 and finds value in the stock if the company is able to reach these targets in the medium-term.

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