By Geoffrey Smith
Investing.com -- For one investor at least, it’s time to take a bit of profit on the long-term trends that the Covid-19 pandemic has accelerated.
Swedish venture capitalist Kinnevik sold a 4.4% stake in German online fashion house Zalando (DE:ZALG) on Tuesday, realizing 645 million euros ($729 million).
The sale, which was upsized moderately due to strong demand in the accelerated bookbuilding process, means that Kinnevik has now got back all of the 902 million euros it invested in the startup, and still has a 21.3% stake to play with – worth another 3.1 billion at Monday’s closing price.
Kinnevik has more than enough scope to take profit after a 50% run up in the last three months that has left the stock look a little over-extended. At only 1.5 times trailing 12-month sales, the valuation is far from being the most demanding in the tech universe (U.K. rival Boohoo.com, which reports its quarterly earnings later this week, trades at over 3.5 times), but the current price is an eye-catching 600 times last year’s earnings.
The stock may also suffer from concern about the remaining ‘overhang’ and potential future sales by the Swedish group, now that it has reduced its stake below 25% and no longer has any pretensions to being a strategic shareholder. All the same, there's no sign that Kinnevik is preparing to take the money and run. CEO Georgi Ganev said it only sold because the stock's appreciation had unbalanced its overall portfolio.
As such, it’s hard to see the 5.1% drop in Zalando’s share price on Tuesday as anything other than a decent entry point for a stock with a simple and convincing growth story. Cash flows that would have taken 10 years to materialize may now take half that in an optimistic scenario. Last month, the company reported 50 new third-party sellers through its Partner Program in a mere three weeks, including American Eagle (NYSE:AEO) and Vaude.
This is promising to end the company’s habitual struggle for profitability. It now expects to be “clearly profitable” this year, forecasting up to 20% growth in revenue and gross merchandise value this year, along with up to 200 million euros in underlying operating profit. With clothing being the one of the most popular categories of item for online purchases in Europe (even a majority of over-50s in Europe has bought apparel online), it’s about time.
If one accepts that the shift to online shopping is irreversible, then Zalando has at least some downside protection from the secular trend. The big question for the stock is whether the market will always put the same high premium on growth that it has done in the last few weeks.