Today's write-up is about Redbubble. It was once again a company that benefitted very much from the pandemic with a huge price run-up as well. Nevertheless, I think that significant value can be found over here. Enjoy reading!
Company description
Redbubble Limited operates as an online marketplace that facilitates the sale and purchase of art and designs on a range of products between independent creatives and consumers. The company provides sale, marketing, and distribution services to facilitate the sale of goods from artists to those who want to purchase goods bearing the artists’ designs. It enables ~700,000 independent artists and designers to sell their creations. The company offers its services through its websites at Redbubble.com and TeePublic.com.
Even though Redbubble is listed in Australia, nearly 70% of its revenues come from the United States, 14% from Europe, 10% from the UK, and 5% from Australia/New Zealand. Spread over these countries, RBL has 659.000 artists (up 51%), 9.2 million customers (up 30%), and 41 fulfillment locations (up 9%).
With 117 different products and ~35 million different designs, result in ~1 billion (<< I’m not totally sure about this) different choices for customers. This is made available to them through Redbubble’s print-on-demand operating system. It works this way:
Artists share their designs on Redbubble and determine for what price they want to get for their design (there’s a minimum of course) and on which products the design may be printed. A customer determines that he wants to buy a backpack with one of the hundred thousand designs, for example. That order is sent to the nearest third-party fulfillment operator and they make sure the print is ‘printed’ on the backpack with high quality and sends it off to the customer.
The advantage of this print-on-demand model is that Redbubble doesn’t need to have inventory. This saves them significant costs. As a result of not needed to have inventory, the model allows customers to choose from millions of different designs on the products they want.
Disadvantages are that this model limits the company from using other materials for their products that would bear higher quality. And Redbubble has no direct quality control over the products that are made and printed by third-party fulfillment centers. To prevent bad quality to be delivered to customers, they have arranged strong long-term contracts with their fulfillment partners.
On average, the artists get 15% when one of their designs is printed on a product, the fulfillment centers get 45% for printing and distributing the product and Redbubble will keep the remaining 30%. RBL receives the purchase price up-front and pays fulfillment centers and the artists approximately four and two weeks later. As a result, they will have negative working capital that’s basically temporary free capital that can fuel their growth.
Market opportunity
Key macro-trends that continue to impact consumer demand and grow this Total Addressable Market:
The continuing migration of shopping and purchase from offline to online
The increasing desire from consumers for unique goods and services that express and celebrate their personal interests and individualism
The growing Creator Economy providing new and exciting designs and products that feed this search for personalization and meaning
Especially in the creator economy that we are entering right now, are personalized and unique products more in demand and the trend is that more of these products will be requested in the future. Artists also love the platform because they can focus on making beautiful designs without the burden to create the products.
If artists would choose not to use a print-on-demand marketplace, they would have to operate their own online store or physical store and do the fulfillment as well, besides creating the products by themselves. This would have significant financial upfront costs as well as a lot of time and energy that’s invested. Don’t forget the marketing and sales that needed to be done. Right now, they have millions of potential customers on Redbubble’s website.
Competition
Amazon is not considered a threat to Redbubble because since its inception Amazon launched Amazon handmade, mainly as a competitor to Etsy, but has not been very successful. Right now, Etsy and Redbubble are quite established players, and trying to compete again with them will be very difficult because of the nature of marketplaces.
Also, no one associates Amazon with handmade stuff or special designs. When people are ordering on Amazon, they want to have regular stuff at a cheap price. However, how people see Amazon could of course change if Amazon would double down on the creator economy. I think that’s unlikely.
Then we have Etsy. Etsy is a marketplace for artists to create their own stuff, more handmade things, and those artists need to ship it to the customers. Redbubble is different in nature and artists only need to make fancy designs and publish them on RBL’s website, and they only have to collect royalties from their published designs.
Etsy is probably not going to change its identity from handmade to handmade and print-on-demand. That will mess with their brand. Etsy has been acquiring other smaller marketplaces where people have to create something and list it on that marketplace, like music.
I, therefore, see the probability that Etsy acquires Redbubble to be a lot bigger than that Etsy is willing to compete directly with Redbubble. Another probability is that Etsy acquires a direct competitor of Redbubble (Society6, Zazzle, Teespring, Threadless) and tries to outcompete Redbubble.
Society6 is a direct POD marketplace competitor to Redbubble. Society6 has 400k artists while RBL has 572k artists. They generated nearly $159M gross transaction value (GTV), while RB's $443M GTV was almost triple that. More artists on the platform boost up the number of products that intrigues more customers, more customers attract new artists, and the spiral reinforces itself.
Competitive advantage Redbubble is a two-sided marketplace and marketplaces are very sticky, in general, when they have become significant players. RBL enjoys from the flywheel effect:
When there’s an increase in one part of the flywheel, the other parts will grow as a result: An increase in customers will attract more artists. When there are more designs, customers will be more likely to find the design and product they really love. And an expansion of fulfillment centers will increase the geographical reach of Redbubble, more customers are able to buy from the website and will get their orders delivered sooner, etc.
Right now, Redbubble is the biggest POD marketplace with Society6 as a follow-up. Therefore, Redbubble enjoys network effects. For a marketplace to be successful you need to be the biggest and provide the best and/or cheapest services. Redbubble said that they are going to focus on staying the biggest and try to widen the gap with the other POD marketplaces.
Management
Management’s 4 key initiatives to propel profitable growth:
Artist acquisition, activation, and retention
User acquisition and transaction optimization
Customer understanding, loyalty, and brand building
Further physical products and fulfillment network expansion
“Martin Hosking is a co-founder of Redbubble. He first became the CEO and Managing Director in July 2010. Martin resigned as CEO and Managing Director and became a Non-executive Director on 1 October 2018. Martin was appointed CEO and Managing Director on 18 February 2020 following Barry Newstead’s departure.
Martin has spent over 20 years scaling Australian technology companies. Previously, he was the chair of Aconex, a SaaS provider to construction firms, and Southern Innovation, a digital pulse processing solution. Martin was instrumental in the development and subsequent listing on the NASDAQ of search company, LookSmart. He started his career as a diplomat with the Australian Department of Foreign Affairs and Trade before joining McKinsey & Company, serving clients focusing on emerging technologies.”
Martin owns 44,500,090 shares of Redbubble (16.3%). Approximately 3% is held by other managers/directors of Redbubble.
Since 2021, Michael Ilczynski has become the new CEO of RBL. Prior to this, Michael has been climbing the corporate ladder from Strategic Director to CEO of Asia Pacific & Americas at SEEK. AP&A is an online employment marketplace with 100 million visits per month and generated over $725 million in revenue and $350 million in EBITDA in FY 19.
On 4 March 2021, Mr. Ilczynski bought 361,500 Redbubble shares on market at an average price of $5.53 per share. The share purchase was funded in part by a non-recourse loan of $1.6 million from Redbubble to Mr. Ilczynski. The remainder was funded by Mr. Ilczynski himself.
One red flag for the company is that they have 22,061,755 total awards outstanding (options, share appreciation rights, and restricted stock units), which is as much as 9% of the current shares outstanding. But on the other hand, this will encourage management and employees to be more shareholder aligned and could strengthen the culture in the end.
The company has been cash-flow negative prior to FY20. As a result, the company has increased its outstanding shares from 41.8 million in 2012 to 259.7 million in 2020.
On the contrary, the CEO announced that they would sacrifice short-term margins to invest more in marketing and that should improve their long-term competitive positioning.
Ecosystems (customers, artists, suppliers, employees, regulators, communities)
Artists
The management of Redbubble talks a lot about the artists and says they try their best to stimulate artists to come to their platform and upload designs. Artist acquisition, retention, and activation are therefore also their number one priorities.
Employees
Management said they want to create value for shareholders over the long term and they believe that they need to attract great talent to achieve that. Therefore, they implemented the RECM model, with the following objectives:
Link executive performance with RB Group’s financial goals
Motivate executives to create sustainable, long-term value for shareholders
Align the leadership team by providing consistent goals which encourage a long-term focus
Attract and refrain exceptional talent in globally competitive, highly mobile markets
Financials
As a result of the lockdown, Redbubble’s revenue has accelerated from 25-50% in previous years, to nearly triple digits (95%) in the last half-year. With $480 million in revenues, RBL achieved $33 million in operating income (operating margin of 6.8%). They have a strong balance sheet with $100 million cash at hand and just $6 million total debt.
Because Redbubble has been losing money from when they came public (in 2012) to recently, their ROIC and ROE have been negative. But for the LTM (last twelve months) their ROIC was ~35% and their ROE was ~39%. This indicates that RBL has the ability to generate high returns on invested capital and equity.
Future expectations
Whereas it’s no assurance that they will achieve those LTM high rates on invested capital and equity in the years to come, I think they will achieve similar rates because a marketplace such as Redbubble, has a lot of operating leverage (high fixed costs and low variable costs). This operating leverage will also result in the rapid expansion of RBL’s margins.
Risks
They might be disrupted by companies such as Etsy or Amazon
Artists might stop sharing their designs on RBL because of the number of designs that are already online and it’s just too hard to make any money from it.
In some way dependent on Google SEO
Litigation brought against Redbubble for intellectual property infringement
Not being able to increase the gap between the company and competitors, which could lead to thin margins
Current valuation
In my DCF model, you can see that I have chosen moderate growth rates if we keep in mind what the company has done in the past and if we keep in mind that the market/opportunity for a marketplace as Redbubble is significant.
I expect that they will just grow 10% in 2021 because of the massive growth they have had in 2020, but will continue growing revenues at higher rates thereafter. The key determinator of this DCF model is the significant increase in operating margin over time. Because they are a two-sided marketplace they have significant operating leverage and this will allow Redbubble to keep costs relatively the same over time while increasing their revenue.
Last year, their FCF was higher than their EBIT and is also expected to be higher in 2021. Therefore, I used a 100% FCF margin and 80% after year 6 to be conservative.
A moderate terminal value of 12 has been added as well. The reason for this is that I want here to be conservative as well and because they probably aren’t going to grow fast in 10 years but it is still a marketplace that probably has some kind of network effect going for it.
Why is this opportunity available?
Redbubble has had bad news in the eyes of investors. The new CEO announced that they will invest more into marketing to become a more dominant marketplace. As a result, EBITDA margins will come down in the short term and investors didn’t like that. Andrew Rosenblum (from Bonsai Partners) thinks that it’s a good thing that the company is sacrificing short-term margins for long-term dominance of the marketplace and I agree with him. So, actually, there’s no bad news but the stock has come down and presents, therefore, an opportunity.
How do they try to retain customers and artists?
For now, they only run targeted experiments to see what is getting customers to buy again. They measure the results and are willing to act on the data later on.
For artists, they run a variety of artist engagement initiatives. “It’s not yet scaled up but it's invested and the team is up and running and we’re quite excited about the potential that that has overtime to help artists on both platforms and also potentially create some cross-migration of artists that are on one platform and not the other, particularly where they’re selling artists.”
How do they approach marketing?
Right now, they are also running experiments for marketing. They try to see what is working and will double down on the things that work best.
Artists could also just share their designs on different POD websites, right? So what might Redbubble’s advantage be over those other POD marketplaces?
Redbubble’s advantage is that they are the biggest POD marketplace with the most customer and the most artists. As a result, the flywheel is stronger and should increase Redbubble’s advantage over its competitors.
That's it for today. I hope you enjoyed reading it and learned something along the way. I would appreciate it if you could share your thoughts about this write-up and Betterware in the comments.
Thanks for reading and until next time!