Image source: Britvic (copyright Evan Doherty)
Jam tomorrow. That often seems to be the investment case for THG (LSE: THG). The THG share price is now 40% lower than a year ago. And it was not exactly flying high then – in fact, since its stock market listing in 2020, the THG share price has lost a cataclysmic 95%.
Can that be rational?
After all, there is a lot to like about the business – so much, in fact, that several sophisticated financial companies have tried to buy the whole business in recent years at a far higher valuation than it currently commands on the stock market.
So, should I buy the share for my portfolio now, hoping that it could rebound in a big way in the coming year (and beyond)?
Here’s what dogging THG
The issue, as I see it, boils down to whether or not THG has the potential to be a profitable business over the long term.
So far, the numbers are not promising. While it has been doing over a couple of billion pounds a year in sales, THG’s bottom line looks horrendous.
Last year it lost £248m after tax, following a post-tax loss of over half a billion pounds the prior year. The consistently loss-making business has spilt a lot of red ink in its few years on the stock market.
That, bulls might say, is the nature of the beast. THG is a technology business, investing now to build scale in its online retail outsourcing business. Once that reaches the right point, the positive case goes, that expenditure could pay off in spades. It is a similar story to the one heard from believers in the Ocado business case.
As with Ocado, in my opinion, the crux of the issue comes down to whether such a view holds water. Is THG indeed spending now to reap the rewards later? Or is it simply a business with a failed model, ready to keep burning up cash for the foreseeable future?
Strategic fog does not help
I confess, I am even more confused now than a year ago.
For years, THG was touting its Ingenuity platform as a key growth driver. But last month it finalised plans to demerge that business.
That could help achieve a higher valuation for Ingenuity, which I think has never been well understood in the City.
But I wonder why THG, having blown the platform’s trumpet for so long, decided to demerge it. I also question the rationale for raising money by issuing new shares (as THG did) to demerge the business. Why not simply keep the division within THG, or cut the losses and close it down?
THG management’s strategic plan now seems less credible to me than it did before (and I have long had my doubts). Meanwhile, the beauty division grew sales in the first nine months of last year, while THG’s nutrition revenues shrank 7%.
If another bidder comes along, I reckon the THG share price could soar again.
Looking at the fundamentals, however, I see THG as a consistently loss-making business losing sales in a key division and lacking strategic consistency. Even though it sells for pennies, things might yet get worse. I will not be touching this share with a bargepole.
