E-commerce stocks have been on a tear with the coronavirus tailwinds fueling growth. But the resulting rise in valuations of e-commerce stocks leaves small-cap investors wanting. Not to worry, there is at least one e-commerce play under $5 billion in market capitalization. On the Fool Live episode recorded on Feb. 8, Motley Fool contributor Brian Withers and Brian Feroldi discuss Redbubble (RDBB.Y) (RDBB.F 8.46%), a unique e-commerce marketplace letting artists sell their images on common items like T-shirts and mugs. If you are an e-commerce or small-cap investor, you won't want to miss an introduction to this up-and-coming stock. 

Brian Withers: This one's that I've actually been interested in for about a year. I've been a customer, and have either of you guys heard of Redbubble?

Brian Feroldi: Nope.

Seth Jayson: Stumped.

Brian Withers: Awesome. It's actually this pretty cool e-commerce site, a little like Etsy, little, little e-commerce delivery. We'll talk about it. It's out of Australia.

Seth Jayson: That's why. I couldn't read it, it was upside down. [laughs].

Brian Withers: Exactly. Here is the sort of the sellers page. Anytime you have a marketplace, you need buyers and sellers and so you want to attract sellers. The idea here is, this is nice little pillow here, and Jacqueline Heard is the artist who created this image. We can put her badgers on a throw pillows, on a mask, on a phone case. Let's see, classic t-shirt or a sticker. The idea here is the artist can upload an image, choose what products they want to let their image be seen on, and then it's on the website. Then this quick turn producers make this stuff almost on-demand in the different regions where the website is. Neat little video, you upload your design, customers find the products, products are delivered. The cool thing about this is you get a very unique product and you're supporting an artist.

Here's the website, kind of cool, lots of cool stuff. I didn't go very far. This outer banks thing, I live in North Carolina. So [the] Outer Banks is a cool thing for me and similar, there's another sticker. I can get it in a coffee mug. Let me see where the coffee mug here is. You got the regular old coffee mugs or you have a tall mug. You can get either, 17 bucks. Unique, great gifting idea, reviews, people love it. Then you can see other things. The search website's pretty easy. It's pretty cool.

We kind of talked through this business model. They are a print on-demand marketplace for independent artists. They have over half a million artists, they upload the content. They have a growing set of customers, 6.8 million up 30 percent year-over-year. Then they have 41 fulfillment locations, which is up nine over the course of the last year. There we go.

This is a cohort graph if you've ever seen SaaS companies and whatnot, so artists that came on in 2016, they're this black, this square on the bottom. It's declined a little bit over time, but provides them a stable set of revenue and then you can see the additive new cohorts coming on, adding more and more marketplace revenue by year, so growing revenue.

Sixty seven million paid to artists in FY20. I don't know if you can see the mobile website there, the number of artists growing. Unique customers growing at a 33 percent CAGR, which is cool, compound annual growth rate. Repeat purchases are becoming a larger portion. You can see down here, it's around 30, 40 percent, and it's up considerably here, and it's growing faster than first purchases, which is cool.

I guess they merged with TeePublic or they were called TeePublic before. Similar kind of deal, a t-shirt kind of on-demand printing deal. This is where the traffic comes from, whether it's mobile web or they have an app or a TeePublic app. I just used the website.

This is the fulfillment. They have 19 different fulfillment centers. The other cool thing about this is I imagine the different fulfillment centers focus on a set of things like everybody might do t-shirts and that allows the Redbubble to have a competitive marketplace to make sure that they're getting good gross profits. I know when I order the t-shirt, they maybe more than one fulfillment center that fulfills that specific t-shirt. But based on the freight to me and the cost that they are charging Redbubble to do it, they probably picked the lowest cost provider to total cost between freight and purchase costs to get it to me. You can see US is 70, almost 69 percent of their revenue. You can see they're expanding in some of the other geographies as well.

This is really interesting. We talked about having an image uploaded. Last year, they had 4.1 million images, but the number of items sold was 9.4. You can see this top graph is growing faster. The one image where we saw the Outer Banks thing, there was a sticker, I think they had a magnet and two coffee cups, so there's four different items with that one image. The number of items is growing faster than the number of images, which they talked about leverage from physical products. Having more things you can stick this image on, whether it's a throw pillows or t-shirt, whatever, makes it more interesting or gives the customers more choice in what to buy. Now you can put these images on a 117 different products with hundreds more in the pipeline, and this is the revenue by product launch year. Certainly, this is the 15 and earlier is the biggest, but they're starting to see more sticky revenue of the things that were launched recently.

Here's a set of the products. Backpacks, they have a really cool story on masks, phone cases, jigsaw puzzles, die cut magnet, drinkware. I'm going to have you guys going out to the site here in a minute to buy something.

During COVID, they saw an increase of homewares, artwork, accessories. Across the board, they saw a really nice growth in all of their different categories, of course. A bunch of masks sold 12.1 million in revenue. Certainly not Etsy volume, but I love this part of it, it returned money back to artists and it gives them an ability to sell art all over the world, no matter where it is.

Here's the business snapshot, 349 million in annual marketplace revenue. They got an operating EBITDA[earnings before interest, tax, depreciation, and amitorization] positive, free cash flow positive, repeat customers are going up. Here is the marketplace revenue, 32 percent compound annual growth rate, and then they have the marketplace revenue per employee is even growing. You can see how this is a scalable business as they're producing 349 million [dollars] in marketplace sales with only less than 1,200 employees.

Gross profits, got 36 percent CAGR [compound annual growth rate], operating EBITDA is getting better, so all the right things. This one I really like, I like this one. They get paid. These are the costs, so they have to pay the platform, whether it's hosting cost or whatever. They actually get their money in 1-3 days. They pay the artist in a couple of weeks, they pay the fulfillers after four weeks, the tax in three months. They got a really nice cash flow model. Out of every hundred bucks, they yield $29.3 of gross take rate value.

Brian Feroldi: That's a good take rate.

Brian Withers: Yeah. Etsy is, I want to say, 17 percent-ish.

Brian Feroldi: Yeah. I have to say Fiverr just comes to mind. I know Fiverr is in like that 26, 27 percent-ish range, but the point is that's a good number.

Brian Withers: Yeah. I bet these artists because they're just making the art versus Etsy [sellers], they're doing a lot more work. I don't think the artists mind. If they have a hit and they put it on more stuff.

Brian Feroldi: It's all margin for the artists.

Brian Withers: Oh, absolutely. So great year ahead. Then here's the P&L. FY20 total revenue, 416 million [dollars]. You get down to a gross profit, which is decent. Thirty eight percent with a 42 percent year-over-year growth, they got the marketing, operating expenses, they got a positive operating EBITDA. They're losing a little bit after depreciation and amortizations but, hey, I love it, cool company.