The THG share price just crashed! What happened?

October 13, 2021 0 Comments

Since the beginning of the year, The Hut Group, or THG (LSE:THG), has seen its share price fall by 64%. Most of this e-commerce company’s disastrous performance occurred yesterday, where the stock fell off a cliff, wiping out about a third of the company’s dwindling market capitalisation. So, what happened?

The crashing THG share price

The firm hosted a capital markets day event to explore its new division called THG Ingenuity. This new venture provides insights for other retailers to help them build their own brands and reach more customers. However, the presentation left most investors puzzled or disappointed. It didn’t go much into the details or numbers. Nor did it mention the addition of any new clients, and the company failed to answer any of the analyst’s questions. And it seems many are now jumping ship causing the THG share price to plummet.

A lot of hype had been built up about the growth prospects of Ingenuity, especially when Softbank entered the picture. The investment group holds a significant stake in the business and options to buy 19.9% of Ingenuity for $1.6bn. After yesterday’s performance, these options are essentially worthless since it can acquire a large stake for the same amount of money by simply buying shares on the open market.

How did management respond?

The founder of THG and current CEO, Matthew Moulding, has said the company is under attack by short-sellers from the hedge fund community. It’s not uncommon for founders and entrepreneurs to lash out at short-sellers. Elon Musk does that all the time with Tesla

But in the case of THG share price, there may be a good reason behind the rise in short-sellers. There seems to be a considerable lack of transparency surrounding Ingenuity. Beyond the missing numbers from the investor day presentation, there has been an increased frequency of errors in THG’s reporting. Meanwhile, Moulding recently signed a sale-leaseback agreement on the eve of the firm’s IPO, borrowing money against his personal stake in the business.

However, this may just be a case of poor corporate governance. After all, the errors in reporting could simply be a private business still getting to grips with the scrutiny public companies have to face. And borrowing against shares before an IPO is actually common practice. Evan Spiegal, the co-founder of Snapchat, did the same.

Did the crash create a buying opportunity?

As a result of the crashing THG share price, the company now trades at a price to sales ratio of around 3.1. By company, other e-commerce leaders like Amazon and Shopify trade around 3.8 and 5, respectively. Based on these numbers, it seems the valuation has come back down to Earth. At least, that’s what I think.

The firm might be able to deliver on the hype. And it does, then the THG share price could be selling for a bargain right now. However, personally, I remain untempted. The lack of information surrounding Ingenuity’s financial performance and management’s ‘blaming others’ attitude raises alarm bells in my head. So, for now, I’m keeping this business on my watchlist.

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Zaven Boyrazian does not own shares in THG. Zaven Boyrazian owns shares in Shopify. The Money Cog has no position in any of the companies mentioned at the time of writing. Views expressed on the companies and assets mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.

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