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Would I buy The Hut Group shares?

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Since a strong IPO, The Hut Group (LSE: THG) share price has fallen around 25%, currently sitting at 611p. Nonetheless, in my view, this has given the company a more reasonable valuation. As such, is now the time to buy or is there further to fall?

Trading Update

The Hut Group’s recent trading update was fairly strong, in particular demonstrating good revenue growth. Indeed, in comparison to 2019, its 2020 revenues were over 40% higher at £1.6bn. This was driven by an increase in customers. In fact, the company now have nearly 7m active customers, which is an increase of 2.8m from the year before. I’m also confident that this number can continue growing, especially as new products are released.

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In addition, the industries that THG operates in, mainly beauty and nutrition, are growing. For example, the prestige beauty market is expected to reach £150bn by 2024. This should help the company in its aim of further growing revenues and attracting more customers.  

On the other hand, the company did make an operating loss of £480m. Although much of this was attributable to share-based payment charges, it still means that it’s hard to give the shares a fair valuation. Therefore, there’s a risk that the company will be unable to reach profitability in the near future, and this could strain The Hut Group share price.

Acquisitions

One aspect of the company I do really like is its acquisitions strategy. For example, in February this year, it acquired Dermstore to increase the scale of its beauty ops and improve the online business. I feel that this acquisition was very shrewd and will be fundamental to growing revenues in the future.

More recently, THG also acquired Bentley Laboratories, a prestige beauty developer and manufacturer, for $255m. Once again, I’m enthusiastic about this acquisition because it will enable more product development. Furthermore, it’s estimated that this acquisition will increase 2022 revenues by $77m. From a long-term perspective, I believe that The Hut Group share price may benefit on the back of this.

Of course, there are risks with making too many acquisitions as an alternative to focusing on organic growth. For instance, the companies being acquired are often bought at a premium. As such, The Hut Group shares could be negatively impacted if they don’t produce the desired results. Although I don’t believe that this is the case here, especially because I feel THG has a good balance between making acquisitions and focusing on organic growth, it’s a risk that still needs to be considered.

Am I buying The Hut Group shares?

Due to strong consumer loyalty, and strong growth prospects, I feel that the shares have significant upside potential. In my view, the recent dip looks like a correction, rather than being overly problematic. For this reason, I’m very tempted to buy, as I think that they could be a very good addition to my diversified portfolio.

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Stuart Blair has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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