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Even in pennies, is the THG share price a value trap?

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I have been curious about the THG Holdings (LSE: THG) business for a while. I think its range of digital commerce offerings could be set for growth as online shopping continues to increase in popularity. With the THG share price now 63% lower than a year ago, despite ongoing sales growth at the company, could it be a bargain for my portfolio – or a potential value trap?

Improving sales

Last month, the business updated the market on its performance in the first nine months of the year. Overall, revenue grew 8.8% compared to the same period the prior year. I see that as a strong showing.

Revenue in the company’s Ingenuity division was up 17.6% and has nearly tripled in a couple of years. This part of THG provides digital commerce solutions to other companies who want to sell online. That could be a lucrative model if it reaches big enough scale.

Meanwhile, THG said it has seen a positive start to the final quarter.

Declining share price

Set against a positive sales performance, why has the THG share price fallen so far?

I think the company seems confusing to some investors. For example, the real contribution of Ingenuity to its overall business model remains hard, if not impossible, to understand. THG’s company accounts contain lots of adjustments that make it hard for me as a potential investor to gauge the performance of the business with confidence.

THG also remains heavily loss-making. In the first half, operating loss after adjustments was £89.2m. Last year the company reported a post-tax loss of £138m.

Although revenue growth can be appealing, as a long-term shareholder, I want to invest in a company that can make money. So far, THG has not shown an ability to convert growing sales into profits. That alone is enough to put me off investing in it.

Long-term perspective

Over time that could change however. The sales growth suggests the company’s products and services appeal to its target audience. I also think the idea of selling digital commerce software as a service is a good one. That could turn out to be very profitable for THG as the scalability of such an approach can mean marginal profits are high.

But the business needs to do a lot of work to prove it is able to turn a profit. If it doesn’t, there’s a risk that a need for more liquidity could lead to shareholder dilution. That risk helps explain some of the share price fall, in my view.

Another risk is the possible negative impact on sales of tightening consumer budgets in a recession. For some shoppers, the sorts of beauty products and nutritional supplements THG sells may not be important enough to justify expenditure when times are tough.

Despite collapsing already, I think THG shares could still turn out to be a value trap, even at today’s price. The loss-making business faces a challenging trading environment. Its business model remains largely unproven in terms of profit potential. Despite having fallen a long way already, the THG share price could yet fall further. I have no plans to buy the shares for my portfolio.

The post Even in pennies, is the THG share price a value trap? appeared first on The Motley Fool UK.

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C 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.