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Redbubble: Venture With A Value Flavor

Launched, headquartered and listed in Australia, but doing the bulk of its business in the United States (61% of revenue) and Europe (30%), the self-branded “blue-collar startup” Redbubble is an under-followed and fast-growing online marketplace focused on connecting independent artists with a wide audience of customers (of which two-thirds are under 35 years old) in fervent demand of self-expression.

The concept is simple: artists upload their designs on the platform via an intuitive, community-based interface; customers select their favorites and can apply them to a range of +60 products (apparel, stationery, housewares, bags, wall art, etc.); Redbubble then pockets a 15-20% commission on the artist’s price, before routing production and delivery to one of its fulfillment partners.

So far the formula has worked wonders, with revenue growing twentyfold since 2012. The number of unique customers also grew from 1.5mil to 4.9mil between 2015 and 2019 (+34% per year), and the number of selling artists from 96,000 to 421,000 (+45% per year).

Larger than its direct comparables (Society6, Minted, Threadless, etc.) and positioned on a different segment than Etsy, which focus is on handmade and vintage items,  Redbubble offers a massive, forever expanding library of artworks. It now caters to 320 million visitors, 5 million customers and close to 0.5 million selling artists.

In contrast with the likes of Cimpress, who handle the fulfillment part rather than outsourcing it, Redbubble should be approached as a content business, working on building an evergreen library of artworks that grows organically with negligible investment.

This asset is what enables the flywheel effect pursued by all successful online enterprises: as it gains in scale and broadens its offering, Redbubble becomes the preferred platform for artists and customers alike — the much exalted “winner takes it all” pattern.

(Interestingly, in a recent earnings call management called Etsy’s dominance “unassailable” on its own segment, while making no secret of their ambition to emulate such accomplishment.)

In addition, the company builds up bargaining power as it deals with fulfillers from a position of strength, aggregating millions of customers and delivering hundreds of thousands of orders directly to them. This success-critical feature remains hypothetical still, for gross margins have yet to expand despite the impressive growth performance.

The beauty of the model lies in the ultra low capital requirements. Redbubble has scaled without heavy investment in equipment, receivables or inventory. In that respect, working capital is negative and returns on investments — if measured in terms of revenue, share of non-paid traffic and user engagement — phenomenal.

The company proceeded with an IPO in 2016, during which it raised $40mil at an average price of $1.33 per share — vs. a current price of $1. Directors didn’t sell out and retained a 35% ownership of equity capital. An upcoming listing on the U.S. market seems a very plausible prospect, for it would immediately boost valuation and open access to a much larger pool of capital, unlike the small, commodities-focused and somewhat obscure Australian market.

The company’s strategic priority is to establish itself as the largest global online marketplace for independent artists, providing for low-cost scaling and user acquisition. Growth has been primarily funded by cash from operations so far, but as business expands fresh capital will certainly be required to allow for acquisitions.

Pursuing this objective, management has just completed the buyout of TeePublic — a well-managed, profitable American peer focused on customized t-shirts. New shares were issued at $1.50 to fund the deal. According to a major shareholder yours truly talked to, TeePublic’s founders had the opportunity to sell to a German acquirer, yet elected to transact with Redbubble instead — this, in order to get shares in the combined enterprise.

Redbubble grows fast and efficiently — and maintains a debt-free balance sheet, for management is adamant about not buying growth — but has yet to reach profitability. Still, by private market’s standards, the company trades at a surprisingly low valuation of x1 revenue. Smaller peer TeePublic was acquired for 1.8x revenue, while Etsy trades at 12x revenue.

(No position.)

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