The reason growth shares have that name is because investors hope that such companies will be able to grow quickly. If that happens it could be reflected in a share price that also increases at a handy clip. But one well-known UK growth share has lost over 80% of its value in the past year alone.
Could this be a buying opportunity for my portfolio?
Strong revenue growth
The stock in question is THG (LSE: THG), previously known as The Hut Group. The THG share price has collapsed since its flotation in September 2020.
When the company initially came to the stock market, investor enthusiasm seemed high. THG runs over 180 retail websites in areas such as beauty and nutrition. It also offers online sales and fulfilment services to other businesses through its Ingenuity division. But things soon turned sour, with growing concerns in the financial community about the long-term prospects for Ingenuity.
This month the company reported that revenue for the past year grew by 35%. The Ingenuity business grew even more strongly, posting a 41.4% increase in revenue to £194m. Such growth rates look impressive to me. So, why has the THG share fallen so far?
Disappointment and uncertainty
Although the revenue growth was strong, its most recent trading update contained news that disappointed investors too. The company said that its adjusted earnings before interest, tax, depreciation and amortisation would come in lower than the market expected. It pinned that shortfall on movements in exchange rates.
The company forecast revenue growth this year of 22%-25% but warned that high commodity prices are a concern. There is a risk they could hurt the profit margins of some of the company’s direct product sales.
As well as that news, investors are struggling to figure out how profitable the company’s business model might end up being. In its first half, THG recorded an operating loss after adjusted items of £17m. On top of that, the company rents quite a few properties from its founder. That sort of arrangement is not common among large listed companies. I see it as a potential distraction for the founder from the core task of running the company.
I will pass on this UK growth share
I am in two minds about the future prospects for the THG share price. The company’s fast rates of revenue growth look attractive to me. I think there is quite a lot that it seems to be doing well, from gaining customer traction online to improving sales in Ingenuity. In the long term, that could be good news for both revenues and profits. If the company proves its business model, today’s market capitalisation of £1.6bn could come to seem cheap.
On the other hand, I continue to feel that the business is overly complicated. Its unconventional approach to corporate governance issues and the lack of detail on Ingenuity’s profitability do not inspire confidence in me as a potential shareholder. THG might still do very well. But I continue to find it difficult to establish clear expectations for the company’s financial performance in the coming years. For that reason, I will not be buying it for my portfolio.
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Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
