Shares in The Hut Group (LSE: THG), which owns a number of retail brands and also operates an e-commerce services platform, have tanked. Three months ago, the THG share price was hovering around the 600p mark. Today however, it’s close to 200p.
This share price fall seems to be attracting value hunters. Last week, The Hut Group was the fifth most purchased stock on Hargreaves Lansdown. Should I buy the stock for my own portfolio? Let’s take a look at the investment case.
The Hut Group: the bull case
There are definitely some things to like about THG from an investment point of view, in my opinion. For starters, the company is growing quickly. Between FY2015 and FY2020, revenue climbed from £334m to £1,614m. That represents a compound annual growth rate (CAGR) of an impressive 37%. City analysts expect the company to keep growing rapidly in the short term. This year, they expect revenue to rise another 37% to £2,214m.
Secondly, its e-commerce services platform, Ingenuity, appears to be highly scalable. This platform is an end-to-end solution that takes care of a range of services for retailers, including hosting payments and checkouts, performance marketing, global fulfillment and warehousing, and customer service. Using this platform, brand owners can focus more on their market strategy and worry less about operations. To my mind, Ingenuity has similarities to Canadian e-commerce powerhouse Shopify, which is worth nearly $200bn today.
The company’s third-quarter update showed that Ingenuity is seeing strong growth. For the quarter, revenue came in at £11.7m, up 131% year-on-year. During the period, it won 44 new clients.
Could The Hut Group’s share price keep falling?
However, while there are things to like about THG, I also have some concerns. One is the fact that the company is not yet profitable. Last year, it posted a net loss of £533m. This year, analysts expect a net loss of around £20m. The lack of profits adds risk to the investment case. Unprofitable companies are harder to value. They also tend to be highly volatile investments.
Another concern is that the group’s largest shareholder, BlackRock, just sold a ton of stock. Last week, the investment management giant sold 58m THG shares – nearly half its stake – at 195p, a 10% discount to the market price.
This sale is a little worrying. As Russ Mould, investment director at AJ Bell, said last week: “Asset managers rarely sell after a stock has already fallen so much unless they’ve lost all confidence in the business and/or found something that completely changes the investment case.”
Should I buy THG shares?
Weighing everything up, I’m happy to leave The Hut Group on my watchlist for now. The company certainly looks interesting however, there is a little too much uncertainty for my liking. All things considered, I think there are better growth stocks I could buy today.
