As the THG share price sinks, buying the dip could be risky

THG (LON: THG) share price plunged on Thursday, becoming the worst-performing stock in London after the company published weak financial results. The stock dropped by more than 16% and reached its lowest level since June this year. It has retreated by more than 34% from the highest point this year.

THG, formerly known as The Hut Group, published mixed results, as the management continued implementing its turnaround strategy. Its adjusted EBITDA rose by 22.9%, higher than its previous guidance. Its EBITDA came in at £47.1 million, a 45.7% increase.

THG Nutrition’s revenue rose slightly to £340.7 million while beauty’s dropped by 10.7% to £538.7 million. THG Ingenuity’s revenue also slippers by 14.9% to £320 million. As a result, the total revenue dropped by 16.3% to £950.6 million.

Therefore, the THS share price dropped sharply as investors reacted to the falling revenue. The company attributed this weakness to its disposal of OnDemand, which has long dragged its operations. It also attributed it to the ongoing inflationary pressures. In a statement, Matt Moulding, the CEO said:

“The cash performance of the Group has been strong in H1, but also over the last 12 months. Group cash flow performance improved by £350m compared to the previous 12 months, reflecting the completion of our global infrastructure roll-out program.”

THG also has a good balance sheet, with over £560 million in cash and available facilities. This is a strong number considering that the company has a market cap of over £952 million.

Despite all this, I believe that the THS share price has more downside in the next few months since it lacks a clear catalyst. It will continue facing the challenges that it faced in the first half of the year, including inflation and a weakening economy.

The best outcome for THG would be an acquisition. In 2022, the e-commerce company turned down several takeover approaches by several private equity companies. Matt Moulding argued that these bids severely undervalued the company and called them ‘unacceptable.’

In May this year, the company ended buyout talks with Apollo Global Management, the American private equity company.

The daily chart shows that the THG stock price formed a major top at 109.75p. It then made a bearish breakout after the latest financial results. As it dropped, it moved below the important support level at 83.48p, the lowest level on August 21st. 

The shares have moved below the 50-day and 200-day moving averages and a death cross is about to form. Further, the Relative Strength Index (RSI) and the Stochastic Oscillator have drifted downwards. It dropped below 79.34p, the highest level in November last year.

Therefore, the outlook for the THG share price is bearish, with the next support level being 55.56p, the lowest swing on May 23rd.

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