The Hut Group (LSE: THG) shares have been under pressure recently. Since the stock’s IPO earlier this year, shares in the e-commerce company have lost nearly 60% of their value.
There is no one particular reason why the market has been treating the company so badly over the past few months. It looks as if there are a range of factors that investors are concentrating on.
Reasons to sell the Hut Group shares
First of all, there are corporate governance issues. Hut Group Founder and CEO Matthew Moulding was given a golden share in the corporation at the time of its IPO to maintain control over the business even when it went public. There are also some question marks over transactions between the CEO and the business involving company property.
As well as these issues, it seems as if the market is struggling to place a value on a business it does not understand. The group has two parts — its e-commerce operation, and the software and logistics business, Ingenuity.
Ingenuity sells its technology to other retailers in the online sector. After an investor day earlier this month, where the company tried to explain this technology arm’s outlook, the stock dropped significantly. It seems as if analysts were disappointed with Ingenuity’s progress.
However, I think this could be an opportunity. Ingenuity is backed by the Japanese investor SoftBank. This group understands technology. It has supported a string of high-flying tech firms and manages the SoftBank Vision Fund 1 as well as the SoftBank Vision Fund 2. Together these two funds manage $154bn. Most of that cash is invested in technology companies.
SoftBank’s investment valued Ingenuity at £4.5bn. So clearly, the group thinks this business is worth a significant amount.
It might be the case that UK investors do not understand how to value such an early stage growth company.
At the same time, Moulding has recently said that he will be giving up his golden share and overhauling corporate governance. This is another step in the right direction for the group and should meet some of the City’s corporate governance concerns.
Undervalued
All in all, I think the Hut Group shares now look undervalued. The company is trying to change, and the world’s most significant tech investor thinks its Ingenuity division is incredibly valuable. Based on these factors, I would buy a speculative position in the stock for my portfolio today.
Still, this growth company may not be suitable for all investors, and I wouldn’t invest a large amount in it. The Hut Group is still loss-making. It could remain so for some time as the e-commerce sector is incredibly competitive. Moreover, just because SoftBank thinks Ingenuity is worth £4.5bn, it does not mean other investors will agree with this valuation.
These are the most significant risk factors hanging over the stock today.
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Rupert Hargreaves 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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