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The THG share price has surged! Should I buy now?

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The THG (LSE: THG) share price has had a torrid few months, and at one point had crashed by over 75%. However, in December the stock has surged by a huge 38% as I write today. While it’s still over 70% down on its January debut price, this recent resurgence has prompted me to reassess the investment case here.

Is the market repricing the growth opportunities on offer at THG? Let’s take a closer look to see if the stock is a buy for my portfolio.

The bull case

As a quick recap, THG is an online retailer of its own and third-party brands. The company also provides an end-to-end e-commerce solution for consumer brand owners under its THG Ingenuity division.

THG Ingenuity is crucial for the company’s future growth prospects in my view. In fact, Japanese conglomerate Softbank entered a collaborative agreement with THG in May that saw it invest $730m in the shares. What’s more, Softbank has an option to acquire a 19.9% stake in THG Ingenuity for $1.6bn, provided it’s separated from the main group into a THG-owned subsidiary. There’s also potential to leverage Softbank’s connections across its portfolio companies to grow Ingenuity further.

The most recent interim results to 30 June showed impressive year-on-year revenue growth of 41.9%. In particular, THG Ingenuity revenue grew by 39.7%, which is important given the prospect of the Softbank deal. City analysts also expect group revenue to increase by 26% in 2022, which is still strong growth.

The bear case

There have been governance risks with THG in the past that I wrote about here. I’d have to be comfortable with these issues before buying any shares.

But it’s the cash flow that I’m concerned about today. The company is highly acquisitive, and also has major capital expenditure (capex). THG had capex of £239m during 2020, with a further £112m spent on acquiring businesses. There have been a further eight acquisitions in the six months ending June 2021. This suggests to me that THG is a capital-intensive business. As the company remains loss-making, it’s had to raise capital from debt and equity issuance to pay for these investments. There’s a high chance of further share and debt issuances going forward, which heightens the risk for shareholders.

It’s hard for me to understand the potential with THG Ingenuity because the company doesn’t separate out its profit margins and cash flow from the other divisions. It may be that it’ll be a capital-light and highly cash-generative business in the future. But today, I can’t determine if this will definitely be the case.

Is THG stock a buy?

With so much riding on the success of THG Ingenuity, I’d have to be confident of its success. It clearly has potential given the interest from Softbank. If it does take up the option to acquire the 19.9% stake in Ingenuity, I see considerably upside in the THG share price from here.

But THG doesn’t fit my preferred mould for a growth share. I like to see a capital-light company that can reinvest in the business with its own generated profits. Right now, THG requires considerable external capital to grow, which means I won’t be buying the shares today.

The post The THG share price has surged! Should I buy now? appeared first on The Motley Fool UK.

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Dan Appleby 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.