With digital sales expected to keep growing in coming years, it may seem odd that a company that enables digital commerce has seen its shares tumble. But that is the story at THG Holdings (LSE: THG). Over the past year, THG shares have fallen a painful 82%. In other words, I could now buy five for slightly cheaper than the cost of a single share this time last year.
Is this a potential bargain for my portfolio hiding in plain sight?
Understanding the fall
Normally if a share price collapses like that, one of the key questions I ask myself as an investor is what lies behind the fall.
When it comes to THG, several reasons explain why investors have soured on the growth story. A disastrous City presentation last October sent the shares plummeting. But I think that just made existing investor nervousness stronger.
At the heart of the price fall has been a question about how valuable THG’s business is. As well as its own online retail business, the company has a division called Ingenuity that seeks to provide digital commerce solutions to other brands. Ingenuity sounds like an interesting opportunity for a scalable platform, something that has been lucrative for firms like Shopify. But the economics and likely profitability of the division have remained hard for investors to fathom.
THG has also rubbed up some investors the wrong way with its approach to corporate governance. I do not see this as the core reason for the share price fall. Indeed the company has been improving its approach, for example, splitting the chair and chief executive roles. If the business performance was strong enough, I think such governance concerns would be less important to many investors.
Strong revenue growth
Looking at last year’s results, business performance actually does look strong to me in some ways. Revenue grew 35% to £2.2bn. Revenue growth slowed in the first quarter this year, but still stood at 16% year on year.
Profitability is more of a concern. The company reported an operating loss of £137m last year. Net cash fell last year by almost £240m. A growth business like THG can eat up a lot of money to develop and scale its business. I think that explains its losses. I expect such costs to continue in years to come.
Should I buy THG shares?
The company announced last month that a potential bidder is mulling an offer. The deadline for such a bid expires tomorrow. That comes in the wake of THG revealing that it had recently received multiple takeover offers it had rejected as “unacceptable”. If bidders potentially see value in THG’s share price, should I?
Not necessarily. A bidder for a whole company can have different ways to unlock value than an individual shareholder.
I like the company’s business strategy and think its strong revenue growth shows that THG may be able to keep scaling its approach. But the lack of profitability concerns me. Ingenuity seems promising, but is only a small part of the overall business. Given the uncertainty such risks pose to the company’s future profit outlook, I do not see THG shares as a bargain at the moment. I will not be adding them to my portfolio.
