Since its initial public offering (IPO) in September 2020, The Hut Group (LSE: THG) share price is up 27%. But I think this stock has further to go.
The Hut Group’s stock market debut was the UK’s biggest technology IPO, as well as the largest London listing since Royal Mail in 2013. I first started writing about the stock back in December. I’m still bullish on The Hut Group share price and would buy the stock. Here’s why.
#1 – Portfolio of brands
The Hut Group operates under three divisions: THG Ingenuity, THG Nutrition and THG Beauty. I’ll address THG Ingenuity shortly.
The Nutrition and Beauty businesses are a portfolio of growing brands including MyProtein, LookFantastic and GlossyBox. Most of its products are its own, which means margins will be higher than if it sold third-party brands.
I like this as it gives the company long-term control over product pricing. This in turn can boost profitability and The Hut Group share price.
#2 – Ingenuity
The third division is Ingenuity, which I think is the real jewel in the crown. This is a software unit that helps businesses run their e-commerce operations using an all-in-one platform. I think the Ingenuity product has great potential.
Over the past few months, the group has secured new partnerships with big-name brands to use the software. Ingenuity has a rapidly growing list of partners including Nestlé, PZ Cussons and Homebase. They’ve signed long-term contracts, which builds up credibility for the product.
I think Ingenuity’s growth will continue in 2021 but this is dependent on how coronavirus has impacted companies’ finances. The software will also diversify The Hut Group’s reliance on beauty and wellness.
#3 – Acquiring brands
The company is also growing by acquisition. I think this is a sensible move as it can pick up some bargain companies given the pandemic. This is what Boohoo did when it acquired Oasis and Warehouse last year.
In December, The Hut Group announced that it had purchased Dermstore.com, the US e-tailer of prestige skincare and beauty brands, for $350m in cash. This has diversified the portfolio of online beauty assets and enables the company to cross-sell its products.
I expect company to continue to use the proceeds from the IPO to acquire brands. This should boost revenue and cross-selling opportunities. But this will take time to bear fruit and impact the bottom line.
#4 – Trading statement
The Q4 2020 trading statement was positive. Strong growth was seen across all divisions and it finished the year in a good position. The company expects revenue growth for the 2021 financial year to be between 30% and 35%. These are big double-digit figures. But such optimism has its downsides and if these forecasts are not met, this could hurt the share price.
My view on The Hut Group share price
The Hut Group is a high growth stock that I think is doing all the right things for now. It IPO’d at the ideal time by riding the coronavirus online shopping boom.
The company has indicated that it expects strong growth, which if not met could impact the stock. Investors like me don’t want to think that management is being too optimistic in its revenue forecasts. But I think The Hut Group share price is undervalued and I believe the stock can rise from here. I’d buy.
