At a 50% discount, is the THG share price too cheap to ignore?

When THG (LSE: THG) launched its capital markets day, it was meant to strengthen shareholder sentiment. However, it did the complete opposite. In fact, due to shareholders starting to lose trust in the business, the THG share price fell by 35% in a day. This means that since its IPO, the shares have slid over 50%. But amid rising revenues, and a rebound of 10% yesterday, is THG a great recovery stock.

Capital markets day

There were a few reasons for the pessimism after the capital markets day. Firstly, there were some concerns about the company’s technology platform, Ingenuity. Indeed, although SoftBank has an option to acquire a 20% stake in Ingenuity next year for $1.6bn, which would value the business at around $6.3bn, it has declined to exercise this option early. As such, there are worries about SoftBank’s commitment, and whether the deal may have to be renegotiated.

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Further, the company continued with its lack of transparency. Indeed, there was very little information about the major clients of the Ingenuity division and a lack of evidence regarding its success. For example, in the company’s half-year results, Ingenuity revenues only totalled £85.8m. This makes the large valuation of it seem very steep. As such, without any extra evidence of where this high valuation is coming from, it’s no surprise that the THG share price fell so significantly.

Recent results

Despite these problems with the company, it has also been performing strongly, especially in its nutrition and beauty divisions. Indeed, in its half-year trading update, the group reported revenues of £958m. This represents growth of 45% year-on-year. Some 82% of revenues came from the beauty and nutrition divisions, which include brands like Lookfantastic and MyProtein. If the company can continue in a similar fashion, it would be on track for annual revenues of £2bn. This would put the company on a price-to-sales ratio of under 2, which is by no means expensive for a growth stock. This could be a catalyst for the THG share price to climb.

It also reported adjusted EBITDA of £81.2m, a 40% rise year-on-year. While the group is not profitable yet and made an operating loss of £17.4m in the first half of this year, this positive adjusted EBITDA gives me hope that it’s on the route to profitability. The loss was also attributable to acquisition-related costs and Covid-linked distribution costs. These are likely to be short term. As such, I’m not too worried about the group’s current unprofitability.

What next for the THG share price?

After its 35% fall a few days ago, I feel that the market may have slightly overreacted. As such, I believe that THG may be a very strong recovery stock. Despite this, the current lack of transparency around much of the business does make the company a risk. This means that, although I do think the THG share price may be slightly undervalued, I’m going to watch from the sidelines for now. This is because I feel there will be significant volatility over the next few weeks, something I don’t currently want in my portfolio.

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Stuart Blair 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.

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