I’m wary of companies that enjoy tech-like valuations, but lack obviously innovative technology. Hence, I’m sceptical of THG (LSE: THG), formerly The Hut Group, an e-commerce business. Founded in 2004 to sell CDs, Manchester-based THG operates 100+ websites that sell direct-to-consumer via its proprietary e-commerce platform. Its three main divisions (health, beauty and nutrition) sell items including cosmetics and protein shakes.
So far so good. But the THG share price dived massively on Tuesday, following a disastrous investor presentation.
THG share price soars then slumps
On 16 September 2020, THG floated in London’s largest initial public offering (IPO) since 2013, raising £1.9bn. The IPO price of 500p valued THG at £4.5bn. First-day trading saw the stock surge to 658p — or 31.6% — before closing at 625p (up 25%) for a valuation of £5.6bn. However, driven by hype, euphoria, and the belief that e-commerce is the future, the THG share price kept climbing. At its intra-day peak of 837.8p on 12 January, the stock had soared by 67.6%. With a 17% stake, this made founder, executive chair and CEO Matthew Moulding a sterling billionaire.
But the shares then started to weaken. On Friday, 10 September, the stock closed at 664.5p, well ahead of the IPO price. But it has since imploded spectacularly. As I write on Wednesday afternoon, the THG share price hovers around 281.4p, collapsing 57.7% in under five weeks. Yikes!
What went wrong for THG?
On Wednesday morning, the THG share price had crashed to a lifetime low of 248.6p before rebounding. But the real damage happened on Tuesday afternoon, when the group held an investor presentation. Institutions wanted more info on THG Ingenuity, the group’s white-label online retail and logistics arm that’s possibly the hidden jewel in THG’s crown. But analysts were highly unimpressed by CEO Moulding’s musings and relentless selling sent the shares plunging. On Tuesday, the stock closed at 285p, down over 150p — or 34.8% — in a single session.
Moulding blamed the collapse in the THG share price on short-sellers (traders who borrow shares to sell so as to benefit from falling prices). But this argument was roundly mocked in the City, given that under 2% of THG shares are out on loan. Analysts also pointed out that THG is highly cash-flow negative and might just be another multichannel retailer, rather than a true tech innovator.
Another Softbank bungle
In May, THG Ingenuity was in the spotlight after giant Japanese tech investor SoftBank invested $730m in it at a share price of 596p. This deal also gave SoftBank an option to buy 19.9% of THG Ingenuity for $1.6bn within 15 months. This valued THG Ingenuity at £4.5bn, but THG itself is worth just £3.4bn today. This is the latest in a growing list of Softbank investment flops. These include its ownership of ailing office-space provider WeWork and a complex $1bn bet on fraudulent German payments group Wirecard. Oops.
Going forward, THG said it plans to separately list its beauty division in 2022 and is considering listing other divisions. I don’t own this stock at the moment and have no plans to buy at the current THG share price. For me, there are too many red flags around this business, including multiple property sales by Moulding to THG, plus repeated reporting errors in company results.THG shares are far too risky for my blood.