I must say, I'm quite impressed by this business.
RedBubble is realising their ambition of
"creating the world's largest marketplace for independent artists". I think we have a wonderful confluence of factors here that have combined to create a strong business.
- The Founder is an exceptional and talented individual
- The on-demand model enables RBL to match the demand created in an efficient and highly profitably manner -- this is an extremely capital lite business with excellent (and improving) margins
- Their business is being pushed by 3 key trends: a) they are an emerging winner in a rapidly shifting landscape (personalisation of e-commerce goods), b) this is reinforcing the inherent flywheel (network) effects and c) the shift to e-commerce and online has been accelerated by COVID - this is a structural change, we aren't going back
- They have a very strong balance sheet and a nice cash buffer
- The valuation multiple is still extremely low and enticing at circa 3x MP revenue, compared to comparitors at 10x revenue or more
The big question is how large can RedBubble be? Could Martin Hosking become Australia's next billionare by holding 16% of RedBubble's issued capital? We receive some clues here by studying other 2-sided marketplaces. The CEO of Etsy, a US$18B market place for handmade goods is RedBubble's bigger brother. The CEO stated:
Let's take a deeper look at some of the larger 2-sided marketplaces as a glimse into the future for RedBubble. RBL is already now at scale and currently one of the world's top 50 largest marketplaces. But, Etsy makes the top 10. (Note: the list below is not all-encompasing):
The valuation of Etsy at $18B USD is circa 21x bigger than RedBubble at a $1.1B AUD valuation. But, how much larger is Etsy in terms of the top line of the business? How much revenue is Etsy bringing in relative to Redbubble? How many years "behind" is Redbubble before they reach the current revenue scale of Etsy and potentially the same valuation?
In 2016, Etsy reached $365m USD in annual revenue, which equates to $502m AUD. Sound familiar? In FY20 RedBubble reached $474m in gross transaction value on their platform. Analysts expect Redbubble to hit $550m AUD minimum in marketplace revenue (GTV minus commission for artists) for FY21.
I think Rebubble is about 4 years behind Etsy in terms of the revenue trajectory. The historical growth rate is the same. The total addressable market is similar. The concept is similar. The management teams are equallly impressive. The tailwinds are the same.
So, what sort of valuation could RedBubble reach? How has the valuation of Etsy tracked?
In FY16, when Etsy was of a similar revenue scale to Redbubble, the company had a valuation of circa $1.2B USD. Sound familiar? At a share price of $6, Redbubble has a valuation of $1.6B AUD, which is a valuation of $1.2B USD.
Over the next 4 years the Etsy valuation climbed to $1.9B USD in FY17, $5.4B USD in FY18, $8.2B USD in FY19 and now has hit $18.1B USD. In 4 years, the valuation of Etsy climbed 15x. How did this happen? As shown in the chart above, the increasing scale and operating leverage of the company and the strengthening network effects
rewarded the company with a higher revenue multiple.
Investors became willing to pay a higher multiple for every $1 that the company brought through the door in sales. Not only did revenue grow from $365m USD to more than $1B USD in those 4 years (2016-2020), but the revenue multiple also increased from 3.5x to 12.5x. Strong revenue growth AND a re-rate of the valuation multiple -- these are the twin turbo drivers of enormous share price appreciation. The sort of share price appreciation that can change a life.
What happens next with RedBubble? Will the next 4 years for RedBubble be as exciting as Etsy's last 4 years? I have my own answer to that question, but everyone needs to come to their own conclusion.
Enjoy the journey that lies ahead.
T.E.P.
