The THG (LSE: THG) share price is falling again this morning. Shares in the technology and retail group are down by 12% as I write, despite the company reporting a 38% rise in sales during the third quarter.
THG stock has now fallen by 55% since its flotation in September 2020. This makes the group one of the worst-performing IPOs I’ve seen in recent times. Despite this, THG’s business is delivering strong increases. At today’s reduced valuation, I’ve been wondering if it’s finally time for me to consider buying shares in this fast-growing business.
Strong growth in Q3
Supporters of THG’s growth story might wonder why the shares are down today. The company said that group revenue rose by 38% to £507.8m during the third quarter. This was driven by a 61% rise in beauty sales, which rose to £247.6m.
Beauty is THG’s largest business, generating half the group’s sales. But investors’ big hope for the future is the THG Ingenuity e-commerce business. This provides a range of services for THG’s own brands and external customers. These include website hosting and other e-commerce services, such as order fulfilment.
Revenue at Ingenuity rose by 46% to £51.1m during the third quarter, but only £11.7m of this related to higher value e-commerce services. The remainder appears to relate to services such as website hosting and translation. According to today’s numbers Ingenuity now has 163 live client websites, each generating average annual recurring revenue of £170,000.
Management says that the existing order book supports forecasts for 400 client websites by the end of next year.
Ticking the boxes for a promotion
THG is planning to apply for a premium listing on the London Stock Exchange. This would make it eligible to join a FTSE index such as the FTSE 250, potentially attracting new investors.
Premium listings have higher standards of corporate governance than standard listings like the one THG is using at the moment. To satisfy these requirements, CEO and founder Matthew Moulding has agreed to give up his so-called golden share in the business, which effectively limited other shareholders’ voting rights.
Mr Moulding has now also agreed to give up his chairmanship of the company and become CEO only. THG will recruit a new chair in the coming months.
THG shares: my decision
The firm appears to be making progress. I’m certainly impressed by the group’s revenue growth. Sales have risen by 42% so far this year, compared to the same period last year. However, I’d really like to know more about how this business makes a profit.
Broker forecasts suggest an operating profit of just £48m this year, from sales of £2,217m. Since its IPO in September 2020, THG has refused to share details of the profitability of each of its divisions. This leaves me in the dark — especially as the company plans to separate Ingenuity into a standalone business next year.
I’m tempted by THG’s fast growth. But the company’s shares trade on more than 100 times 2022 forecast earnings. I don’t have the confidence to buy into this story at the moment, so I’ll keep watching for now.