Adam Schwab: How Redbubble’s share price burst in 18 months

In January 2021, the share price of design marketplace operator Redbubble hit a pandemic super-charged high of $7.04 a share, giving the company a market value of just under $2 billion. A month later the business told investors that marketplace revenue had almost doubled to $353 million for the past six months and made net profit of $42 million for the half. New CEO, Michael Ilczymski was understandably jubilant on an investor call, claiming that “consumers desiring products that are personalised and unique as well as the focus on environmental sustainability will continue to grow in importance with Redbubble being an ongoing beneficiary of each of these structural trends”. 

Unfortunately for Redbubble investors, things haven’t gone so well since then.

On August 17, Redbubble announced marketplace revenue of $483 million for the entire year (down from $553 million) alongside a net loss of $25 million. Redbubble’s share price duly slumped to 71 cents — a fall of 90% since January 2021. Redbubble’s share price is remarkably almost half the level it was going into the pandemic, which gave the business unprecedented tailwinds.

Ilczymski took over from Redbubble founder, Martin Hosking, who had spent a year as interim CEO of the business. Hosking certainly has an interesting background, after completing an arts degree in 1984, Hosking spent six years working for the Department of Foreign Affairs as a diplomat in places like Egypt and Syria, before undertaking an MBA and briefly working at McKinsey. After 18 months he would join McKinsey colleague, Evan Thornley, at dot.com era juggernaut, LookSmart. 

At the time, LookSmart, which manually catalogued the world’s web pages, was one of the most valuable search engines on earth (before being obliterated by Google). Hosking ran Looksmart’s technology and product teams for a number of years, quietly departing the business in 2001 after its share price fell from being worth billions to essentially zero. As a small side note, a key director of LookSmart was a fellow named Anthony Castagna, who would go on to co-found ASX-listed disaster, Nuix, before receiving a four-year sentence for tax fraud (his conviction was later quashed).

After the LookSmart disaster, Hosking went on to chair successful construction-tech firm Aconex, before founding Redbubble in 2006. Redbubble is a relatively complex three-sided marketplace which works with designers and manufacturers to produce artist-designed products like t-shirts, phone cases and for a brief (profitable) moment, face masks. Redbubble makes a margin on all the products it sells after paying the manufacturer and a small royalty to the designer. Redbubble would eventually list on the ASX a decade later, initially performing well, with its share price doubling over four years. 

In November 2019, Redbubble reappointed popular CEO, Barry Newstead. Newstead had been CEO since 2018 and COO for five years prior and had built one of the most respected technology teams in Australia. A couple of months later, Hosking announced he was selling 6 million Redbubble shares, reaping just under $12 million. 

Less than six months after being reappointed, Newstead was terminated by the RedBubble board and Hosking was suddenly back as interim CEO. A few weeks later Redbubble announced that revenue had grown by 25% to $213 million for the half, while the business lost $3 million. Insiders speculated that the Redbubble board wanted to focus on profitability rather than growth. (The respected Newstead would soon become a senior executive at the far more successful and valuable global giant, Canva).

In March 2020, just a month after Newstead departed, powerful long-time Redbubble chair Richard Cawsey abruptly announced he was quitting. Cawsey had been a seed investor in Redbubble in 2006 and been chairman since 2010 — his departure gave Hosking almost unfettered control over the business. Cawsey’s retirement as a director would also allow him to sell shares with impunity, not requiring to inform shareholders.

Redbubble’s 2019 Annual Report indicated that Cawsey owned 5.4% of Redbubble shares (and his superannuation fund owned 3.45%). Redbubble’s 2021 Annual Report indicates that Cawsey’s superannuation fund holding is only 0.75%, meaning that Cawsey sold the vast majority of his shareholding. Cawsey’s sell-off certainly contradicted his optimism back in February 2020, when he told the AFR: “It’s hard to say just how positive I am for the future of the organisation.”

It seems Cawsey wasn’t quite so positive to want to continue to be a major shareholder in the business.

Following Newstead and Cawsey’s departures, Redbubble quickly focused on maximising short-term profitability. This itself is a justifiable or even preferred approach. The problem is, the focus on short-term metrics led to a rapid disintegration of the business’ world class technology team. The talented Redbubble engineers and product managers who left the business would quickly find roles at businesses like Canva, Bluethumb* and Atlassian.

Technology is a slow burn, the payoff for investment will often take years, so in the short term, aided by the pandemic tail winds, Redbubble looked like it had turned a corner to massive profitability.

Of course, all was not what it seemed. As it lost valuable tech talent, slowly Redbubble would be forced to pay more for customer acquisition. Hosking (and later Ilczymski) ended up cutting talented technologists at the exact moment that, hindsight shows, they should have been investing in the business’ technology team. Pandemic tailwinds, especially with mask sales, temporarily concealed the underlying problems at Redbubble, but eventually, the piper would need to be repaid.

The fruits of Redbubble’s focus on short-term profitability are now being borne out. For the half year ending June 30, 2022, Redbubble generated total revenue of only $288 million (only slightly higher than its December half 2019 result under Newstead, where marketplace revenue was $180 million). But the loss of top talent meant that Redbubble was forced to spend $33 million on marketing expenses in the last six months (compared to only $21 million for December half in 2019). 

To make matters worse, Redbubble’s well respected chief financial officer, Emma Clark, announced her shock resignation last week, fleeing Redbubble for “a private technology company”.

With a dwindling cash balance and tens of millions of dollars in losses in the past 12 months, it’s becoming increasingly likely that Redbubble will need to turn to investors once again for more capital — bearing in mind this is a business that has been incinerating cash for almost all of its 16 years (other than its brief pandemic respite). In sum, Redbubble has accumulated losses of $67 million over its lifetime and has seen its market value drop to a miserly $199 million.

Redbubble’s performance must be especially galling for activist investor and 6% shareholder Osmium Partners, which continues to agitate for a strategic sale of the business.

While investors like Osmium have seen the value of their shareholdings plummet, one canny shareholder did manage to sell millions of dollars of Redbubble shares for more than five times its current price. Who was that shareholder? 

Well, that would be Martin Hosking. 

On September 2, 2021, when Redbubble shares were trading above $4 per share, Hosking sold 5 million shares reaping a $21 million windfall. At the time, Hosking claimed that the sale was needed to repay Equities First, which appears to be a margin lender (Hosking still has 2.25 million shares subject to a margin loan).

The timing was certainly convenient for Hosking — just over six weeks later, Redbubble announced a disastrous financial result, with EBITDA slumping by 85% — shareholders fled, with the stock crashing by 60% in three months. Given Hosking’s role as founder and director (as well as former CEO), it appears unusual that the Redbubble board would allow him to sell tens of millions of dollars’ worth of shares weeks before what was a catastrophic earnings announcement.  

Hosking wasn’t exactly hard up for cash at the time. A year earlier, on 21 October 2020, Hosking sold 6 million shares at $5.52 each, collecting $33.1 million. Hosking donated a significant amount of that sale windfall to the University of Melbourne, garnering a blaze of positive publicity at the time. When Hosking sold those shares, he claimed that he “has no intention to sell any further company shares in the near term and remains fully committed to the long term goals and growth of the Red Bubble Group.” 

That commitment appeared to last a grand total of 11 months.

Unfortunately for Redbubble shareholders, the only thing that has grown since has been the company’s losses. The shares that Hosking sold for $65 million would have been worth $8 million now while Hosking’s entire remaining stake is now worth a total of $29 million. 

Disclosure: The author is an angel investor in and director of Bluethumb, an online seller of Australia art. (Redbubble is, in essence, a design giftstore). The author is also the founder and CEO of LuxuryEscapes.com and a director of Private Media, the publisher of SmartCompany.