The Hut Group Shares Down 45% in October – Time to Buy THG Stock?

The Hut Group shares have declined 45% so far in October while they accumulate a year-to-date loss of 65% since 2021 started as a result of a fading pandemic tailwind, profit warnings from multiple online retailers, and a disappointing interim result released a month ago.

Most of the decline has occurred during the third quarter of the year and seems to have started on 16 September on the day that the firm released its financial results covering the first semester of the year as shares dropped nearly 7% on that day.

Back then, the cross-category online retailer reported a 42% jump in its top-line results, with sales landing at £959 million compared to £676 million it sold during the same semester a year ago while its adjusted EBITDA experienced a 38.6% year-on-year jump to end the first half of the year at £81 million.

However, pre-tax losses for the company increased significantly from £49.9 million back in the first half of 2020 to £81million by the end of this first semester and that appears to have spooked investors.

Shares kept on declining on the days that followed, yet at a slower pace. However, yesterday, on the day that the company hosted its Capital Market event, shares declined as much as 35% as market participants became hesitant about the potential success of the company’s Ingenuity e-commerce platform.

Reports claim that SoftBank, the primary backer of this initiative, refused to exercise an option to acquire a 20% stake in THG Ingenuity and that caused concerns about the project’s funding sources.

In a disclosure found in the firm’s interim report, SoftBank’s option to invest $1.6 billion into the initiative effectively valued Ingenuity at $6.3 billion. However, if the Japanese conglomerate backs down from the deal, that would jeopardize its valuation and this situation appears to have triggered yesterday’s pronounced sell-off.

Can this sudden downtrend continue for The Hut Group stock or is the market overreacting to these latest developments? Join me in the following article as I take a closer look at the price action and fundamentals of this British online business.

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The Hut Group Shares – Technical Analysis

THG shares are in full-blown falling knife mode since its interim report came out on 16 September. It is typically a bad idea to try catching a falling knife before it hits a floor and a floor has not appeared just yet.

In fact, shares of the Manchester-based online retailer are hitting their lowest levels since they went public and billions of pounds have evaporated as a result of this sell-off.

The company attempted to calm investors’ selling appetite by issuing a statement addressing this sudden decline in its share price. However, this measure seems to have backfired as shares are diving another 2% this morning.

In this statement, the company attempted to highlight some positive fundamentals of its business and this was interpreted as a form of “advertising” that is typically not welcomed by markets as it reflects some desperation from the management and an unnecessary focus on the often erratic and unfounded fluctuations of the stock market.

From a technical standpoint, there is not much one can say about THG shares until the stock price hits a floor. Thus far, the stock has recovered from a 12.6% intraday loss to a less than 2% decline during a session that has seen over 10 million shares exchanging hands – more than 2 times the 10-day average.

Could today’s intraday low mark the bottom for The Hut Group shares? It certainly could if one focuses on the fundamentals of the business and its overly depressed current valuation.

The Hut Group Shares – Fundamental Analysis

Today’s decline has pushed the market capitalization of The Hut Group to around £3.5 billion. Interestingly, the deal with SoftBank valued the Ingenuity unit alone at over £4 billion.

That aside, The Hut Group reported first-half sales of nearly £1 billion and is on track to produce at least £2.2 billion in revenue for the 2021 fiscal year. Using that forecast, the group is being valued at less than 2 times its forecasted sales for the year.

Investors appear to be worried about funding for the Ingenuity project at the moment and possibly about the management’s inability to convey in-depth information about how successful the deployment of this solution has been. This would involve providing data about major customers, revenues from the subsidiary, and other similar relevant insights.

However, by the end of the first semester, the company had £879 million in cash and equivalents and reported £90 million in capital expenditures including its investments in the Ingenuity platform.

To some extent, failing to secure funding for this project from SoftBank could slow down the rate at which the project is growing. However, the company’s cash position and forecasted capital expenditures for the future (around £220 million for 2021) show that THG has enough money to keep investing in its core business and further growth opportunities.

With this in mind, this latest decline seems exaggerated and may be the result of some short-term distortions. At this price, THG shares seem attractive considering the low multiples at which they are trading and the potential market value of the company’s intangible assets, brands, and portfolio of tech solutions.

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