Homewares and furniture

Made.com is a homeware and furniture business that designs and sells its products primarily online and via seven showrooms throughout the UK and Europe.

Last June, Made.com decided to make the company public and list shares on the FTSE via an IPO. There were high hopes and the shares listed for 200p each, giving the company a valuation of close to £1.2bn. The first day of trading saw shares drop by 8% but they did recover somewhat to reach a high of 202p a week later.

As I write, Made.com is very much a penny stock, trading for 60p. A drop of 70% between the IPO and current levels is stark considering the positive sentiment around the IPO last year. At current levels, the company’s market cap is just under £250m.

For and against investing in shares

FOR: Made.com’s rise and growth to date has been excellent. Since inception in 2010, it has continued to perform well and gain customers at a healthy rate. Its most recent figures showed it had over 1.3m active customers. It has an ‘great’ rating on Trustpilot with over 106,000 reviews. The IPO was done to raise funds and increase investment to boost growth for the business.

AGAINST: Growth stocks have come under pressure in recent months. This could explain the share price falling to a penny stock status. Many other stocks have also seen their share prices drop too. In times of economic uncertainty, such as now, with soaring inflation and a lack of growth, investors turn to safer options rather than a growth stock like Made.com.

FOR: Made.com has performed consistently in recent years. I do understand that past performance is not a guarantee of the future, however. Looking back, I can see it has grown revenue and gross profit for the past four years in a row. Coming up to date, its full-year report for the period ending 31 December 2021 made for excellent reading. It reported an increase in gross sales, revenue, active customers, and gross margin.

AGAINST: Made.com’s model of designing, manufacturing, warehousing, and fulfilling its furniture is something that could hinder progress. This is due to current macroeconomic headwinds such as the rising cost of raw materials as well as the global supply chain crisis. Increased costs could see profit margins squeezed. A lack of products or delivery issues could send consumers to competitors, affecting performance and returns.

A penny stock I’d keep on my eye on

I must confess I am a Made.com customer and purchased some of its products when I moved home a few years back.

Would I buy Made.com shares for my holdings currently? No, I wouldn’t. There are a few factors putting me off. Firstly, the business is not yet profitable, which worries me. Next, despite its impressive progress to date, it operates in a highly competitive and saturated marketplace. This could hinder growth and performance ahead. Finally, current macroeconomic headwinds could cause issues with growth and returns too.

For now, I will keep Made.com shares on my watch list.

As the latter once remarked: “It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.“

Today, I’m going to focus on two UK growth stocks that, thanks to the ‘Sage of Omaha’ and his colleague’s advice, I thankfully never fancied and still don’t. 

70% down!

I was sceptical about global review platform Trustpilot (LSE: TRST) when I first looked at it last September. At the time, the share price had soared 70% or so since its IPO earlier in the year.

Despite such impressive gains, I just couldn’t shake the feeling that it lacked an ‘economic moat‘. This is a term coined by Buffett to describe a business with sufficient competitive advantages to consistently fight off rivals. Might it be possible to copy what Trustpilot has done with sufficient capital and eventually steal its crown? I believe it is. 

But this wasn’t the only red flag for me. As well as being concerned about the potential for Trustpilot’s review system to be abused by bad actors, I was wary that the company was not making a penny in profit. 

Since then, the shares in this growth stock have tumbled almost 70%!  

Trustpilot isn’t without promise. Back in January, the company announced it expected FY21 annual recurring revenue to hit $144m. That’s a sizeable jump from the $119m achieved in the previous year. Based on this, investors might suggest the stock is a potentially lucrative contrarian pick.

With the rotation into value showing no sign of abating just yet, however, the outlook for the share price looks pretty bleak. Like Warren Buffett, I’d prefer to stick to proven quality stocks rather than take on the additional risk here.  

Another struggling growth stock

A second company I’m steering clear of is furnishings and homewares retailer Made.com (LSE: MADE). Just the fact that I’ve never looked at this growth stock until now speaks volumes.

While investors in Trustpilot enjoyed early gains, anyone backing this other relatively new stock will only have seen their stake sink in value. From a 52-week high of 214p, Made.com’s shares are now languishing at 73p a pop.

Again, the lack of economic moat strikes again. With so much competition, is there anything that will compel me to only shop with Made? Not at all. Contrast this with Buffett’s huge holding in Coca-Cola. The owns so much of the beverage titan because he knows a lot of people refuse to drink any other brand. This advantage arguably makes it far less risky. 

On top of this, the rise in the cost of living can’t be good for business. The boom in home improvement we’ve seen since the pandemic arguably peaked long ago too. Yesterday’s news that CEO Philippe Chainieux is stepping down is another unfortunate development.

With a market-cap now below £300m, perhaps the fall has been overdone. The website certainly looks slick and Made appears savvy when it comes to social media. For me however, this mostly presents as another unprofitable story stock that was opportunistically listed. 

However, I think this could be an opportunity for long-term growth investors like myself to snap up a few shares in this expanding UK business. 

Penny stock growth opportunity 

Even though shares in MADE have been under pressure over the past couple of months, the company’s underlying fundamental performance is nothing to be sniffed at. 

According to a trading update published at the beginning of the year, sales increased 38% during 2021 to £434m. Compared to pre-pandemic levels, sales were up 79%. What’s more, the overall active number of customers increased 26% to 1.3m. 

As well as its existing business, the company is also pursuing a major growth initiative in its marketplace offer. The group is building an online platform for designers, artisans and smaller brands. These users can leverage the site and infrastructure to reach a wider number of consumers and process orders. 

This is similar to the model Amazon pioneered with its Amazon Marketplace division, which has become a significant profit generator for the group. 

These are the two primary reasons I think MADE is an attractive growth penny stock to buy today. The company’s flagship business seems to be firing on all cylinders, and its marketplace initiative could provide significant additional growth in the years ahead. 

That said, the company also has to overcome some significant headwinds. These include the supply chain crisis, which is having an impact on overall group order lead times, and higher prices. And while the marketplace initiative could become a significant profit centre for the business, this is a competitive space. MADE will have to fight other online giants for a piece of the global retail industry. 

Good resources

Still, despite these headwinds, the group has the resources available to fight for market share. At the beginning of January, the company had cash resources of over £100m.

Based on current analyst projections, this will be enough to support the business until it is profitable. Analysts believe the firm will lose money in its 2021 and 2022 financial years. However, they are projecting a small profit for 2023. 

Of course, there is no guarantee the company will hit these growth targets. Nevertheless, I think they illustrate its potential over the next few years. As such, I would be happy to acquire the fallen star for my portfolio as a speculative growth penny stock.

As MADE cements and develops its place in the online furniture market, I think it can gain market share. Ultimately, this should help boost the company’s profit margins and provide more capital to reinvest in growth initiatives, supporting additional sales and earnings growth. 

A penny stock that has halved in value

First up is Made.com Group (LSE:MADE). It has a share price of 96p at the moment, having fallen from its IPO price of 200p last spring. This is a hefty slump in less than one year, as the company has battled with supply chain disruptions. 

In the December trading update, it revised down revenue and adjusted EBITDA. In fact, adjusted EBITDA went from being positive to having a forecasted negative £12m-£15m figure attached.

This is the key risk going forward, in that the business struggles to get products to customers. However, it said that regarding the supply chain “the group has built stock positions to deliver significantly better lead times to consumers for 2022 and beyond as orders placed with suppliers are now in or close to our warehouses.”

Another update on financials in January showed that gross sales are up 38% year on year, highlighting that demand is there from consumers. Therefore, if the supply chain issues can be resolved, I think the penny stock could see the share price climb from current levels.

An idea on the lithium surge

The second company that I’d put £500 in is Zinnwald Lithium (LSE:ZNWD). I recently wrote about lithium stocks in more detail, that can be read here. The reason why I like the businesses that it’s at the exploration end of the sector. Given the large rise in the price of lithium over the past six months, the company should be able to benefit from this.

The project is located in Germany, with approved licenses and a mine life of 30 years. Zinnwald specifically is catering to “supply high value lithium products to Europe’s rapidly growing EV and energy storage markets.” Given the growth in the electric vehicle (EV) market in the past year, I’ve no doubt about the demand going forward.

The penny stock has seen the share price rally 27% in the past year. Yet at 16p, there’s still plenty of room to run higher before it trades above 100p. I personally don’t think that the stock is on many investors’ radars. If and when it does, then the share price could take off.

However, I do need to be conscious of the risks. This isn’t a stable play by any means. If the project doesn’t pay off as expected, or if the EV sector develops to a stage where lithium isn’t a key need, Zinnwald could really struggle.

Here, I’m going to look at the investment case for Made.com shares. Should I buy this stock for my portfolio?

Made.com: the business

Made.com retails curated furniture and homewares to customers in the UK, Germany, Switzerland, Austria, France, Belgium, Spain and the Netherlands through a localised e-commerce platform.

Since its launch in 2010, Made.com has grown significantly and along the way has developed a large, active and loyal customer base. Last year, it had around 1.1 million ‘active’ customers (unique customers who shopped at least once during the year). The brand is particularly popular with Millennials.

Made.com operates a vertically-integrated business model that covers the entire product lifecycle from product development and sourcing through to global shipping, warehousing, and home delivery. To create its product range, it partners with over 150 established and up-and-coming designers, artists, and collaborators.

The IPO price was 200p per share, valuing the company at around £1.2bn.

Made.com shares: the bull case

From an investment point of view, there are a number of things I like about Made.com. Firstly, I think the company has a great offer. In the last few years, I’ve purchased a number of its products, including a leather sofa, an armchair, and a sideboard and, overall, I’ve been very happy with the products. Made.com seems to offer high-quality products at good price points.

It’s worth noting that Made.com has over 11,000 reviews on Trustpilot and overall has a ‘great’ rating with a score of 4.2 out of five. By contrast, IKEA has a score of 1.5. So, clearly, Made.com is doing something right. It also has more than 3m followers across its social media accounts.

Secondly, the company’s growth in recent years has been impressive. Made’s IPO prospectus reveals that last year it generated revenue of £247.3m, up from £211.8m in 2019 and £173.4m in 2018. So annualised growth over this period was 19.4%. That’s pretty good, given UK economic conditions last year.

Source: Made.com

Risks

However, I do have some concerns about Made.com shares. One is that the company still isn’t profitable. Last year, its net loss was £7.6m. This adds risk to the investment case. We’ve seen recently that the share prices of companies with no profits can fall sharply in a market sell-off.

Another issue is the competition the company faces. Not only does it face competition from established rivals such as Ikea, DFS, and John Lewis, but it also faces competition from newer companies such as Loaf. In this industry, barriers to entry are minimal.

Finally, there’s the valuation. At Made.com’s current valuation, it has a trailing price-to-sales (P/S) ratio of about 4.85. I see that as quite high. By contrast, online retailer ASOS has a P/S ratio of 1.5.

Made.com shares: my move

Looking at the risks to the investment case, I’m going to keep Made.com shares on my watchlist for now. All things considered, I think there are better stocks I could buy at present.

Should I consider buying Made.com for my portfolio as the stock is now available for investors like me to buy in an Investment ISA?

What is Made.com?

Made.com is a British online furniture and homeware retailer. It sells its products across the UK and other European countries. It also has about seven showrooms. The company is known for its exclusive design and affordable products. It was founded in 2010 by Brent Hoberman and Ning Li. Hoberman is the co-founder of lastminute.com, which was later sold to Sabre Holdings.

Fundamentals

Made.com’s revenue growth is good. Gross revenue grew at a CAGR (compound annual growth rate) of 27% from 2018 to 2020. In the first quarter of 2021, gross revenue grew by 64% to £110m. The management is eyeing strong future growth, especially in Europe. Continental Europe constitutes around 48% of total sales, and the rest is from the UK. 

The company is yet to make profits. Net loss increased from £4.0m in 2018 to £7.6m in the year 2020. However, operating cash flows have been improving, which is positive. They were £32.2m for the year 2020, and £26.8m for the most recent quarter.

The company has a stable balance sheet. It had cash of £74.5m at the end of March 2021. Post-IPO, the company is expected to have cash of £154.9m after paying the existing term loan of £10m. This is another reason for me to like Made.com shares. I like companies with good operational cash flows and low debt.

Risks to consider in investing in Made.com shares

Some of the risks include maintaining the brand value. Even though the company has maintained a UK Trustpilot rating of 4.3/5, there are a few recent complaints that can be seen online. Some of the concerns raised are late delivery and poor quality of products. If the company fails to address these issues, I feel that the company’s reputation could be badly hit.

Made.com has not been profitable since its inception. It also faces tough competition from big players like Ikea and other companies like Dreams, DFS Furniture and ScS. If the company fails to be profitable, then this could hit Made.com shares to the floor.

The company has limited years of operation. Growth is usually strong in the initial years, and competition increases when companies grow in size. Also, the company is just newly listed. Sometimes listing of the company’s shares is used as a vehicle for early investors to profit. 

Final view on Made.com shares

I like the company’s strong revenue growth and I believe that online retailers will have strong growth. In addition, the operating cash flows are positive, which is a big plus. However, since Made.com shares are recently listed, I will keep the stock on my watchlist for now.