Wow, 2021 has not been a fun year for investors in THG (LSE: THG), formerly called The Hut Group. The THG share price has tumbled by over three-quarters. At its much lower price, is more bad news going to keep coming and will it fall further, or is it a potentially profitable contrarian investment for me?
A saving grace?Â
The one main thing that I think could turn around the firm’s fortunes and boost its share price is its tech platform called Ingenuity. In its ‘Ingenuity Commerce Q3 2021 Update’ report, THG said the operation has high recurring revenue, which is increasing every quarter. That’s the good news.Â
According to that report, after the first three quarters of 2021, Ingenuity has made revenues of £137m. However, Next’s LABEL platform makes £464m in sales annually, so the questions I ask myself are: is Ingenuity that brilliant? And will it scale globally and really boost the THG share price? I’m unconvinced about that. THG may have technology, and technology may often excite investors, but is it really best in class tech that will attract lots of customers? So far the evidence on that seems unclear.
On the positive side, half-year results showed revenue up 41.9%. The gross margin rose 1.3% to 46.5%, which is very high, even by the standards of a technology and e-commerce company.
There’s undoubtedly a UK (and indeed a global) trend towards online shopping, which could benefit THG generally and the THG share price. That’s because investors like to buy into a growing trend.Â
The company is also acquisitive, which could be both a positive and a negative. It helps it grow quickly and develop its own brands, but introduces the risk that the balance sheet becomes stretched and in the context of a falling share price, management may become desperate and overpay for acquisitions. This is usually bad for shareholders.
Potential share price downsides
Further governance issues could see the shares fall further. It’s also known that THG paid rent to properties controlled by the founder. Does that mean incentives are aligned and the best interests of shareholders are being looked after? Personally, I think there are more transparently run companies out there I could invest in.
Also, management presentations this year haven’t exactly won over analysts and investors. In October, the shares fell over a third after the founder, chairman and CEO, as well as the CFO, fronted a capital markets day for investors.
I’m also not clear on the rationale behind spinning out the beauty part of the business given its phenomenal growth. It’s bigger and fast growing than nutrition – the other main part of THG’s e-commerce empire – so why lose it? It feels a bit short term, especially given all the acquisitions THG has made in recent years.
Now it says “Clearly, the THG share price has become much cheaper over a short period of time. The company’s seemingly very strong growth makes the price look tempting in some ways. Yet I feel uneasy about buying the shares. At its cheaper valuation, I may be missing out, but it may also be that the shares keep falling. I’ll avoid them for now until the value of the Ingenuity division and the strategic direction of the company becomes clearer.