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Lessons from a car crash investor event
Thursday 21 Oct 2021 Author: Tom Sieber

It’s hard to think of a more disastrous investor event than THG’s (THG) capital markets day (12 Oct).

This was supposed to be an opportunity to reignite excitement around the company’s Ingenuity e-commerce platform but it backfired spectacularly, prompting a 35% intra-day plunge in the shares.

On the face of it, Ingenuity is a relatively simple concept often compared with online groceries play Ocado’s (OCDO) out-of-the-box solution for global supermarkets.

Effectively THG sells its internet retail expertise as a service, covering everything from getting websites up and running to on-the-ground logistics, an area which looked to have big potential as the pandemic accelerated growth in web-based sales.

THG owns and operates several sites of its own selling nutrition and beauty products.

However, to quote Numis analyst Simon Barker, the Ingenuity platform ‘feels increasingly nascent, opaque and lacking sufficient proof points to justify a significant valuation’.

Investors seem to be coming to this view and little value of any description is now being ascribed to Ingenuity. There is also concern that Japanese investor Softbank may cool on its option to invest in the platform. This option to take a 19.9% stake, agreed in May, had helped underpin assumptions on the valuation.

Ingenuity was always a jam-tomorrow story. In the six months to 30 June, Ingenuity generated revenue of just £85.8 million, although there was no earnings contribution which in itself is probably part of the problem. Also, the one real blue chip client for the platform is/was Nestle raising fears of over-reliance on the Swiss consumer goods giant.

Now the market is waking up to the possibility that the promised jam may never arrive. Recent events offer some vindication for Shares own caution on THG when we noted shortly after IPO: ‘At best we believe investors should demand more evidence of consistent execution as a public company before considering an investment in the shares.’

Our reservations didn’t look so smart when the company reached a peak above 800p, 60% above the issue price from its September 2020 placing. However, it would have required agility to lock in those gains which have now been wiped out and then some, with the shares substantially below their initial price.

Founder Matthew Moulding’s decision to give up his ‘golden share’ to pave the way for a quicker move into the FTSE indices is repairing a little of the damage. But, in its diminished state THG would no longer be a candidate for the FTSE 100.

Next week’s third-quarter trading update (26 Oct) could be key in the short term to what may be the slow and painful process of rebuilding sentiment.

The lesson here is, it is fine to buy stocks which are at the foothills of what could be a major opportunity - after all Amazon didn’t make a profit for the best part of a decade - but you need to understand the major risks involved, have high conviction about what you are investing in, and you need to be patient. 

As we discussed in last week’s issue it might be better to look at a large, well-established retail business like Next (NXT) which is incubating an e-commerce platform business of its own and where it is the cherry on top of the cake, rather than THG where it is integral to the whole investment case.

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