The Hut Group (LSE: THG) share price has charged higher this morning, bucking the broader market sell-off. Shares in the e-commerce group have rallied after the business announced that it had struck a complex joint venture deal with Japanese investment giant SoftBank.
The deal is complex because it concerns a “yet to be formed” technology division of THG. Under the terms of the agreement, SoftBank has bought an option to buy a 19.9% stake in THG Ingenuity.
However, this division, which is now valued at $6.3bn or £4.5bn, does not yet exist. THG Ingenuity will be built around intellectual property and sales infrastructure the group already owns. That should presumably include the existing Ingenuity platform’s IP and operating trade and assets. That platform has been described as a unique digital commerce and fulfilment solution “from first-click to final mile“.
The Hut Group share price growth strategy
The funding from the Japanese conglomerate will allow THG to pursue an aggressive growth strategy at this division. As part of the agreement, SoftBank is also investing a further $730m in the wider e-commerce group.
Looking at this deal, it seems clear to me why The Hut Group share price has rallied significantly. After the deal with SoftBank, THG Ingenuity is now worth as much as the wider group was when it went public last year.
At the time of writing, the group’s market capitalisation is £5.8bn. Of that, its 80.1% interest in the new business is worth around £3.6bn. That leaves £2.2bn for the rest of THG, which was worth around £5bn at the end of last week. These numbers seem to suggest to me that The Hut Group share price is now undervalued.
Indeed, the e-commerce business has seen rapid growth over the past 12 months as consumers have turned to its offering during the pandemic. Its sales rose more than 40% in 2020 to £1.6bn. It reported an overall pre-tax loss of £535m after factoring in costs associated with the IPO.
However, city analysts expect the group to earn a profit this year on sales of £2.2bn. Still, I should caution that these are just projections at this stage.
Risks and opportunities
In my opinion, THG’s deals with SoftBank highlight the company’s attractiveness. However, I think they also showcase the enterprise’s weaknesses. The group needs funding to expand, and as it is still losing money at an operational level, it is relying on the ‘kindness of strangers’ to provide this funding.
As such, it seems to me that the most considerable risk facing the enterprise is a sudden drop in sales, which could hurt cash flow and limit the group’s ability to compete with other peers in the sector.
But even after taking this risk into account, I’m attracted to the company’s growth potential and would buy the stock for my portfolio today. I think it could be one of the best ways to play the current e-commerce boom.
Rupert Hargreaves owns no share 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.