Bearish: Roland Head
When The Hut Group (LSE: THG) gave a presentation to City analysts earlier this week, its shares fell by 35% in a day. I think the shares are probably still too expensive. Here’s why.
First of all, THG doesn’t seem very profitable. Although sales rose by 42% to £959m during the first half of 2021, the group still reported an operating loss of £17m.
Secondly, around 80% of sales come from the company’s Beauty and Nutrition divisions. My guess is that these are both quite profitable. But the company doesn’t include this information its financial reporting. It doesn’t reveal the impact of its regular acquisitions — which boost sales — either.
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As a result, I’m left guessing at the true growth rate and profitability of the Beauty and Nutrition operation. This makes it hard for me to put an accurate valuation on the business.
THG’s big hope for long-term growth is its Ingenuity division. This is a technology platform that provides end-to-end services for third-party brands, including retail, logistics and marketing.
Unfortunately, Ingenuity still seems to be at an early stage of growth. This division only generated £86m of revenue during the first half of 2021. It doesn’t yet make much money and might not do for several more years.
Broker forecasts suggest THG will report earnings of 2.8p per share in 2022. Even after this week’s share price crash, this prices THG shares on 100 times 2022 forecast earnings. That’s too much for me — for that price, I want to know more about what I’m buying.
Roland has no position in any of the shares mentioned.
Bullish: Rupert Hargreaves
The Hut Group has only been a public company for a little over a year, but it has quickly become a stock investors love to hate.
I can see why investors might want to avoid the business. Corporate governance issues, excessive pay and the so-called “founder’s share” issued to the chairman and chief executive, Matthew Moulding, are all potential reasons to avoid the stock.
However, I like the company because it is a tech powerhouse. In the first half of the year, the group reported revenue growth across the business. Revenues jumped nearly 45% to £959m, and it is about to enter its peak trading season.
I am excited by the company’s long-term potential. The Hut Group is one of the few retailers listed on the London market that has been built from the ground up for the e-commerce market. It is even outsourcing its services through a division called THG Ingenuity.
Japanese technology investor Softbank was granted an option to buy just under 20% of this division as part of a fund-raising earlier this year. The Japanese company was one of the first to see the potential of the Chinese e-commerce group Alibaba. So, it knows a thing or two about investing in the tech sector.
As such, while the market may be starting to doubt The Hut Group shares, I am looking past its short-term issues to concentrate on the company’s long-term potential. That is why I would buy the stock for my portfolio.
Rupert Hargreaves does not have a position in The Hut Group.
