Ann: Change in substantial holding, page-10

@Just_a_guy

I think this is heavily overvalued- and will outline reasons why below.
In context- tech valuations are currently at multi-year highs globally.

First the goods:
- negative inventory model- very good for cash
- capital light
- founders have stake
- qualitatively culture looks good
- shareholder communications are excellent
--> for these reasons I don't think this is a clear cut sell

Negatives:
1) Valuation methodology
- Price/sales is completely the wrong way to go here. Given a very high component of variable costs (fulfiller expenses are 2/3 of revenue) the revenue figure is actually more akin to TTV. In fact all calculations should actually be based off the gross profit.
- You can then see that employee expenses are essentially steady at about 50% of GP and marketing expenses make up about 25% of costs. I think marketing expenses will actually also scale up as the business scales, theoretically employee expenses shouldn't but there is no evidence of that yet and I am assuming that corporate costs (unaccounted for here) will scale well.
-So if you then take out the proportion of revenue which can scale effectively you get as a %:
--> 33% when you take out fulfiller costs, then a further 25% of this as baseline marketing
--> The remaining revenue (or about 25%) then can exhibit some degree of operating leverage. If you optimistically assume that you can achieve a net margin in the vicinity of 30% off this at maturity- you get a net margin of approx 7-8% off reported revenue.
in 2020 assuming ongoing 30% yoy revenue growth- you are getting revenues of approx 330M and normalised net profit in the order of 23M or a 2 yr forward PE ratio of approx 17x with very optimistic projections.

2) Competitive environment
- The research I have done suggests that Amazon's Merch is a superior product to redbubble and is favoured by the top artists. If Amazon ever decides to push the accelerator on this service I think RBL will face margin erosion.
- this is the main reason I didn't pull the trigger when prices were reasonable.

For me it is very clearly a watch unless prices drop down massively. It is different holding onto a large capital gain as the immediate loss to the tax man changes the risk free return of moving money elsewhere so I don't know what I would do in your position.
I think the best tech exposure on the ASX is XRO- which is now moving very closely in tandem with the premier US tech stocks in terms of valuation. Everything else is very very expensive right now (eg NEA, WTC and even XRO is VERY VERY historically expensive- see for example: http://tomtunguz.com/saas-valuations-2018/), and the mulesoft acquisition by salesforce obviously has demonstrated that acquirers are willing to pay very substantial multiples for top tier stories.