Sea Limited showed tremendous performance in each of their three business segments in their Q1 earnings report. The dominant position Sea Limited has in three separate and growing businesses is what makes the company so strong. The biggest risk is that one or more of their three businesses will fall off its current pace and lag growing competition. In the company’s Q1 report, Sea Limited demonstrated that they are a company executing better than ever in each of their three business segments.
Shopee
In Q1, Sea Limited announced e-commerce revenue of $922.3M, representing 250% YoY GAAP revenue growth. Gross orders totaled 1.1 billion, a 153% increase YoY. Gross Merchandise Value (GMV) was $12.6B in the quarter, representing 103% YoY growth. Adjusted EBITDA declined to -$413M from -$264M in Q1 ’20 due to increased investments in S&M and R&D. However, Adjusted EBITDA loss per order decreased by 38% YoY to $0.38 compared to $0.61 in Q1 ’20. This indicates that Sea Limited continues to outgrow its costs in terms of gross order volume.
In Southeast Asia, Taiwan, and Indonesia, Shopee ranked #1 in the Shopping category by average MAUs and total time spent in app on Android for Q1, according to App Annie. These rankings are further indication that the strategy management has taken is to prioritize growth in favor of short-term profits – and this is paying off as the company continues to extend its leadership position in various regions.
Sea Limited has expanded its platform into parts of Latin America, but management did not separate out financials in the region. With that said, the company has previously discussed its plans to invest aggressively to building out the infrastructure necessary to compete with MercadoLibre.
Garena
Sea Limited announced digital entertainment (Garena) revenue of $781M, representing 111% YoY GAAP revenue growth. Bookings of $1.1B grew 117% YoY, while Quarterly Active Users increased 61% YoY to 649M. Quarterly paying users grew by 124% YoY to 80M and represented 12% of QAUs for the Q1 compared to 9% for Q1 2020.
The company’s blockbuster game, Free Fire, was the highest grossing mobile game in Latin America, Southeast Asia, and India for Q1. Moreover, Free Fire overtook PUBG Mobile and Call of Duty Mobile as the top grossing battle royale style game in the United States. App data from Sensor Tower shows that Free Fire has continued its momentum into Q2, as it was the 3rd most downloaded mobile app game in the world in April.
Source: Sensor Tower
SeaMoney
Sea Limited’s digital financial services segment saw $51.3M of revenue in Q1, representing 396% YoY growth. This segment is still just 3% of the company’s total revenue as we are in the very early innings of the shift to FinTech in Southeast Asia. Nevertheless, we are seeing promising growth metrics from SeaMoney, showing that they are primed to be a top FinTech player in the region.
Mobile wallet services recorded a total payment volume of $3.4B, which more than tripled compared to the $1.1B a year ago. Quarterly paying users surpassed 26.1M in the quarter.
In December 2020, Sea Limited was awarded a digital banking license in Singapore. A report by Financial Times shows that almost 50% of Southeast Asian adults are unbanked an additional 25% are underbanked.
This underscores the tremendous long-term opportunity Sea Limited is trying to capture in FinTech. There is a long runway for growth in digital banking as well as digital payments in Southeast Asia, and we are seeing Sea Limited begin to position themselves for future growth. Over the long-term, SeaMoney has the potential to be a legitimate source of revenue and capture a bigger piece of the revenue pie in addition to Shopee and Garena.
Q1 Earnings Results
Sea Limited announced Q1 results last month, growing GAAP revenue 147% YoY to $1.8B (US $). Total gross profit increased 212% YoY to $645M, while total adjusted EBITDA advanced to positive $88.1M compared to -$70M in the Q1 2020.
The Q1 adjusted EBITDA number missed the consensus estimate of $173M, but the company has been very transparent about its strategy to aggressively reinvest profits back into the business to focus on top line growth. In total, sales & marketing expenses increased 120% in the quarter while research & development expenses increased 118%. Management appears to be taking the right approach to stimulating growth and engagement in each segment of the business, as evidenced by some of the growth metrics discussed below.
Sea Limited has three distinct business segments in e-commerce, digital entertainment, and digital financial services. All three business segments executed tremendously in Q1, with each segment exceeding a triple digit growth rate. Below is the revenue breakdown in Q1 2021 versus the breakdown in Q1 2020.
Valuation
Sea Limited currently trades at a 12.4x EV/NTM revenue multiple, down from its peak valuation of around 27x last February. Below, we compare this valuation to other international e-commerce stocks MercadoLibre and Jumia. Notably, Sea Limited has higher forward growth projections for 2021 than MercadoLibre or Jumia. The table below shows a more detailed comparison of Sea Limited to MercadoLibre and Jumia. We also included Ozon Group and Coupang, two less expensive e-commerce leaders, for comparison.
Conclusion
Sea Limited did not give guidance for Q2 or FY21, but consensus estimates are calling for 89% YoY revenue growth for the full year. All three of Sea Limited’s business segments are performing better than ever, and the company has a long runway for growth as Southeast Asia continues to become more digitalized. Sea Limited has positioned itself as the dominant e-commerce company in the region with the success of Shopee, the top shopping platform in SE Asia. With Garena, Sea Limited has the most dominant gaming company in the region with no signs of slowing growth. SeaMoney, the company’s third segment, is ideally positioned to be one of the leading FinTech players in the region and will continue to benefit from increased digitalization.
We made a point to cover Shopify last December to emphasize that we did not believe the company was covid-dependent. We spelled out exactly why we were writing a second LTBH PDF on the company during a time of doubt for “covid stocks” (and during the exuberance for small caps).
Most importantly, the trends we outlined in December were recently confirmed in the most recent earnings report. This is what we want to see – analysis that gets in front of results so that we can confirm our ongoing conviction and increase our position (transparently with real-time trades).
The reason we want to increase our position in Shopify throughout the year is fairly straight forward – Shopify is now reaching billions of consumers through social media. The distribution potential of these partnerships reminds me of an avalanche trigger as Shopify will reach billions with Facebook and Tik Tok and hundreds of millions with Pinterest. Now, they only need to build out the Fulfillment Center and focus on improving their own app; although borrowing these mega size audiences is probably the fastest path to growth for our purposes.
I don’t believe Facebook will let Shopify dominate its platform, so keep an eye out for attempts to strengthen Facebook Marketplace. I’m not too worried because Shopify has merchant relationships and it’ll be hard for Facebook to replicate their business model although they may certainly try.
Here are some highlights regarding Social Commerce from the call:
· “The number of shops actively selling on Facebook Shops has more than quadrupled since Q1 a year ago, as well as the GMV through Facebook. While still small, the launch of Facebook Shops in May of last year is clearly starting to make a difference here.”
· “In Q1, we expanded our marketing partnership with TikTok internationally to an additional 14 countries in North America, EMEA and APAC. So far, we've seen good traction in the adoption of TikTok in the U.S. since we launched the integration last October. And we've recently expanded our Pinterest channel into 27 additional markets, opening discoverability and sales opportunities worldwide.”
There are many exciting things going on at Shopify, which we’ve covered at length in the past, including the Fulfillment Center and Shop Pay. Most importantly, we covered exactly why Shopify had taken market share from Amazon and eBay shortly after we launched our premium site. Access October 2019 analysis here.
We also covered Shopify’s positioning in terms of taking over eBay here when we re-iterated our LTBH conviction back in December of 2020. We had been discussing why this was important leading up to the report, and why moving from third position to second position was key for investors during a time of doubt for Shopify.
We also discussed in the LTBH PDF in December of 2020 that “e-Commerce is eating retail” and the various demographics that a company like Shopify can target when partnering with social media apps. The younger demographics is key for social commerce.
To summarize, there are a few reasons that Shopify is set to continue its winning streak and why we plan to increase our position:
1. New distribution channels will reach billions of customers via social media
2. Product-market fit to be achieved in 2021-2023 (we covered this in 2019)
3. Social media spending on ads will increase 18% this year as covered in our free newsletter
4. Second place and has overtaken eBay (we covered this in December)
5. Behavioral ad targeting coming under pressure with Apple’s IDFA – look for an increase in social commerce to offset the shift towards potentially lower CPMs.
We were the first to talk about Snap as an AR/VR stock. The story is moving faster than we previously predicted and we hope you remember the site that brought you this trend first. J
One day, every person on Twitter will say “Snap was clearly a AR/VR story from the beginning” but nobody is talking about this right now. In fact, it’s buried under Facebook’s beat, Pinterest’s DAU concerns and Twitter’s nose dive.
Our job is to talk to you about future trends, and to also silence the noise during periods of extreme sentiment or even around earnings (lots and lots of noise around earnings). We wouldn’t want to add to that noise and assume you read the highlights of any companies you own from the dozen or so sources who cover them.
What’s not being spoken about is that Snap owns the perfect audience for AR/VR. Facebook is in a dilemma here as their subscribership skews older and are less likely to adopt a visually stimulating technology. We will see as time goes on but our money is on Snap. What is the 18-35 year old demographic and also the under 18 demographic really worth? We have yet to find out. Where most tech companies must aggressively take market share or compete at a high level, Snap has to simply keep doing what it’s doing.
Here is the more important take-aways and why are looking to increase our position:
· The company is positive free cash flow for the first time and has strong forward EPS growth this year and next year
· Off-platform AR opportunities such as Camera Kit plus partnerships with companies like Samsung and expanding Android base to reach audiences outside the United States
· Ability to surface premium content through Spotlight and Snap originals and augment these with AR; i.e., Snap is moving beyond social media into original content
· Increased monetization opportunities with AR merging with e-commerce. An example of a successful campaign can drive 30%-40% lift in incremental sales
· Although DAU growth is slow in the United States, it’s strong internationally at 57% this past quarter for Rest of World. Forward growth of 22% on DAU next quarter is impressive considering tough covid comps
· United States ARPU is on a tear at 66% growth leading to 75% revenue growth in this region. Rest of World ARPU is also healthy at 46% growth YoY. Strong guidance on revenue of 85%
Probably the most important statistic from the ER is of the countries that comprise over half of the world’s digital ad spend, Snapchat reaches 70% of 13 to 34-year olds. We want to be AR/VR investors and this is the correct demographic for this trend. Plus, this is important for targeting purposes assuming we do see the IDFA changes from Apple.
Telehealth: We remain in Teladoc …but also still like Amwell
If you want to know what it feels like to invest in the early stages of a trend, telehealth is the perfect example. Remember when I said Nvidia would be an AI leader and dominate the data center, and then there was negative growth in this segment for the first two quarters after my analysis? Seems preposterous that the data center was a low-yielding segment for Nvidia and had negative growth YoY with barely a blip being reported from AI only two years ago.
However, Nvidia/data centers is not an apples-to-apples example for Teladoc because this company faces a much bigger challenge … and nobody knows how it’ll turn out.
I’m not talking about the need for the health insurance companies to reimburse telemedicine permanently (rather than a temporary covid provision). I’d consider this a hurdle and one that I think telemedicine will clear over time.
The big challenge I am talking about is the incredible amount of competition that Teladoc faces. There are many startups receiving funding in the private markets. Zocdoc, a professional booking platform for doctors, launched video consultations last May with the help of Twilio. The company raised $150 million in its last round. Kry is a company popular in Europe that has helped over 3 million patients see a doctor, nurse or psychologist. The company recently closed a $312 million Series D round after its telehealth tools grew 100% year-over-year. Epic Systems, a medical records software company that is used by 54% of patients in the United States, also tapped Twilio for telehealth video conferencing at the start of covid.
Last year, health-tech funding broke records in 2020 with $15.3 billion in funding in the private markets, up from $10.6 billion in 2019. For the first time, healthcare surpassed biopharma with 614 total deals.
Health insurance companies are also in the space, such as United Health Care, with a motivating drive to offset reimbursement costs. This many players commoditizes telemedicine and puts pressure on pricing. This isn’t reflected in the current earnings right now, and in fact, Teladoc is able to increase revenue per user. However, the market is growing nervous because key metrics are flat and there is uncertainty as to how telemedicine will perform in a post-covid world.
Telehealth Trend Overview:
Prior to 2020, telehealth was projected to grow at a CAGR of 25.2% with the global market growing from $61.4 billion in 2019 to reach $559 billion by 2027. The global market is especially important to ensure healthcare is available in remote areas of underdeveloped countries. Internet access remains a barrier for telehealth in remote regions, such as rural India for instance, which has a 20.2% high-speed internet penetration.
In the United States, telehealth was a $26 billion market in 2019.
According to the Centers for Medicare and Medicaid Services, the U.S. spent 17.7% of GDP, or 3.6 trillion on health care in 2018, partly due to an increase in mental and chronic health conditions. The study also highlights that patient monitoring is popular with the elderly with 1 million remote cardiac monitors being used in America.
There is no denying that telehealth had a breakthrough year in 2020. Despite the many breakthroughs ushered in by covid, such as remote work (Zoom, Teams), gym workouts at home (Peloton) and online shopping (Etsy, Overstock), telehealth showed the most rapid growth by far of nearly 4,000% growth across key metrics. Therefore, it’s understandable that the market is attempting to weigh what the growth in telehealth will look like after the one-time event of 2020.
In addition to the market and management attempting to predict what a normal rate of growth will be, the telehealth trend is dependent on federal and state legislation dictating how private payers reimburse telehealth. Full reimbursement is called “payment parity.”
There are 43 states that have some state telehealth statute for commercial payers, yet only 22 states maintain laws that address telehealth reimbursement with a mere 14 states that offer payment parity for telehealth. This is up from 16 and 10 states in 2019.
In the meantime, temporary waivers were offered during covid. We’ve covered in the past how the federal government has passed telehealth bills for Medicare under the CARES Act and other covid legislation. As of now, many of the temporary waivers and emergency legislation is set to expire 90 days after covid’s emergency status is removed.
According to Blue Cross Blue Shield of Massachusetts, the insurance company will continue to support and cover telehealth. However, states like New Hampshire are discussing a bill that would eliminate payment parity as the bill asserts that in-patient care should be paid at a higher rate than telehealth. Opponents point towards mental health and substance abuse as primary reasons the bill should be struck down.
Teladoc ER Overview – Big Revenue Growth but Flat Key Metrics
Teladoc beat on revenue of $453 million, representing 151% growth. The company raised guidance for the year to $2 billion at the mid-point for FY2021 for an increase of $20 million. Revenue in the United States was up 175% and international up 29%.
Despite a strong report on revenue, Teladoc reported a net loss of $1.31 per share – missing expectations by $0.71 for a net loss of about $200 million. This partly contributed to the stock selling off nearly 12% since the report. According to management, “the larger net loss was primarily attributable to increase stock-based compensation, amortization of acquired intangibles, and income tax adjustments primarily related to the merger at Livongo.”
Gross margins increased to 67% up from 59.2% in the year-ago quarter. The adjusted gross margin was 67.8% compared to 60% in the year-ago quarter.
Total visits were up 56% to 3.2 million with the number of consumers enrolled in more than one chronic care program “tripling year-over-year.” The United States made up the bulk of this growth at 69% with international growth at 8%.
Forward revenue guidance is quite strong for Teladoc in the next quarter with $500 million at the mid-point on revenue and positive adjusted EBITDA of $61 million to $64 million up from $56 million adjusted EBITDA in the current quarter.
The management points towards increased revenue per customer as to one reason they are able to sustain this level of revenue growth. Average per member per month (PMPM) was $2.24 in the first quarter, up from $1.76 in the prior quarter. According to management, of the $0.48, half was driven by an extra month of Livongo revenue in the first quarter.
The key metric that showed lower growth (and was most alarming) was 20% growth in paid memberships from 43 million to 51.5 million and 15% growth in U.S. Visit Fee Only access from 19.2 million to 22 million. Forward guidance on this important key metric is expected to be in the range of 52 million to 53 million – in other words, flat sequentially.
For full year, the guidance isn’t much better for this metric with paid membership in the 52 million to 54 million range. Visit fee access is also flat per guidance at 22 to 23 million for FY 2021.
Pictured above: Teladoc US Paid Members are to remain flat year-over-year (YoY)
Total visits are re-accelerating, however, from a plateau in Q2-Q3 2020 where the company stagnated at 2.3 million and 2.4 million, or growth of about 100K visits. Teladoc grew to 200K visits in the last two quarters and is guiding for growth of 400K to 600K visits between Q1 and Q2 2021.
The utilization rate is also climbing, which is important to note. Telemedicine utilization is equal to the number of consults divided by the number of covered employees. Industry averages were between 1-10% prior to covid, yet we see strength in this number sequentially even after many doctor offices have opened up. Besides showing the penetration of telemedicine, the number is important because it affects the cost savings to employers.
Data points from Livongo are also growing nicely and actually accelerated in the most recent quarter compared to when Livongo was a standalone company in Q1-Q2 2020.
Teladoc has strategically added debt over the past several years as the company focuses on growth at all costs. TDOC ended Q1 with $1.35B in long term debt and $723 million in cash.
While debt has increased notably over the past year, Teladoc’s balance sheet still appears to be in very good health. Teladoc’s Debt to Equity Ratio currently stands at 0.086, which is near its 5 year low. A low debt to equity ratio indicates lower risk, because debt holders have less claims on the company's assets.
A Debt to Equity Ratio under 1.0 is ideal because it indicates that for every $1 of equity, the company has less than $1 of debt. In the case of TDOC, we are seeing a strong Debt to Equity ratio of 0.086 that has improved over time, even as the company has taken on more long-term debt.
Teladoc also has a strong Debt to Assets ratio, which is a ratio used to determine how much debt a company has on its balance sheet relative to total assets.
A Debt to Assets ratio under 100% is ideal because it indicates that the company owns more assets than debt. The lower the Debt to Assets Ratio, the less risk the company is carrying on its balance sheet.
Teladoc’s Debt to Assets Ratio is currently standing at a healthy 7.7% and near a 5-year low. Teladoc’s Debt to Assets Ratio means the company is backed by 7.7% of debt, which is a significant improvement from 2020.
While Teladoc’s debt has increased over time, it is much more a factor of a company that is in hypergrowth mode than a company that is struggling financially. This becomes evident when we compare Teladoc’s long-term debt to its equity and assets. Management appears content to strategically use debt in order to fuel growth. This is not uncommon for a company in hypergrowth mode and it is evident in analyzing Teladoc’s balance sheet that the company’s debt is at sensible levels and not a major risk to the business.
Valuation
Teladoc is now valued at 13.58x forward revenue after peaking above 25x at the end of 2020.
In comparison to some others in the space, TDOC looks attractively valued with forward growth expected to eclipse 80% in 2021. The other three stocks we listed for comparison (VEEV, GDRX, AMWL) are not projected to eclipse 40% YoY revenue growth in 2021.
In Q1, legacy Teladoc grew roughly 69% YoY and 9% QoQ. Below is a breakdown of Teladoc’s revenue mix in Q1 from Credit Suisse:
Credit Suisse notes that it is not an apples-to-apples comparison as if Livongo were still a standalone company due to the realization of deferred revenue following the acquisition of Livongo. We are still seeing strong growth from Livongo and legacy Teladoc with 9% and 10% QoQ growth rates, respectively.
It should also be noted that InTouch is now part of TDOC’s single Hospital & Health System business. In Q1, TDOC’s Hospital & Health System business grew YoY as well as QoQ.
There is some investor concern about TDOC missing on EPS two quarters in row, with both misses being caused by expenses related to M&A.
While some Teladoc’s M&A has been more expensive than originally thought in the short-term, this does not affect the long-term thesis. Teladoc is built to be able to incur short term losses and focus primarily on top line revenue growth.
Amwell:
We closed our Amwell position after the company provided low revenue guidance for FY2021 and analyst estimates also showed low revenue guidance for 2022. We simply can’t force timing on a trend even though we continue to keep Amwell on our radar. Notably, Knox trimmed Teladoc in the high-$200s as his technical were also telling us we were too early to the trend.
After Teladoc’s earnings report, there were a few press releases that telehealth has become commoditized. If we were talking strictly about the ability to have a video call with a doctor, then this would be true. But obviously, the goal is how to provide multiple data touchpoints for virtual care. Teladoc has moved into remote monitoring while Amwell is gearing up for AI assistants/carts.
What is intriguing about Amwell is the Google backing, which we covered in the Amwell PDF last year. Google has $100 million of stock in the company with plans to merge AI with health care, including digital waiting rooms, language translations, offloading tasks from the provider to conversational AI and to help manage chronic conditions. Anthem is a large client of Amwell’s and accounts for about 25% of revenue.
The company’s customers often deploy telemedicine through a variety of proprietary Carepoints, which are medical carts and kiosks designed for various clinical and community settings. The company also offers software development kits (SDKs) and APIs to integrate telehealth digitally and to embed into workflows. This includes web and mobile apps, 24-hour nurse and customer support, and electronic health record (EHR) software.
On the same day as Teladoc’s earnings report, Amwell released an announcement on their new telehealth platform that will allow developers to host and deploy telehealth applications. The platform offers a single code base to build a unified care experience to develop apps that utilize Google Cloud’s AI and NLP technologies, TytoCare’s handheld exam kit, connections to clinic physicians (looks like the beta version will be in Cleveland), and Biobeat’s patient monitoring devices. I assume the list of integrations will grow over time.
The new platform may not change Amwell’s revenue trajectory in the short-term but it’s certainly something we are keeping our eye on.
To be frank, we don’t with who the winner is between TDOC and AMWL as long as we get to participate. Therefore, the I/O Fund is remaining flexible between these two and will be looking for signs of strength to determine what position(s) we hold and our allocation as time goes on. Notably, there is a lot of deal flow in the private markets because this a big market to crack for the company who does it.
Mohawk Group is a technology enabled consumer products goods (CPG) company. I first covered MWK in detail here. MWK is a high beta small cap stock with a current market cap of $720M. The stock is down roughly 50% from all-time-highs as many small cap growth stocks have recently undergone a significant correction. Below, I explain why there is a favorable risk/reward proposition in MWK at this valuation.
The rise of e-commerce has made it easy to sell products directly to consumers online. This has created an enormous amount of competition among third-party sellers and a space that is ripe for consolidation. Many successful third-party sellers selling DTC (direct-to-consumer) on different marketplaces such as Amazon, Walmart, etc. lack the technology and resources to scale their businesses beyond a certain point.
Mohawk has built an efficient consumer product platform for CPG brands with its proprietary software platform AIMEE. AIMEE is the data driven AI engine that effectively supports various tasks such as market research, forecasting, pricing, inventory management, marketing & advertising campaigns, supply chain logistics, fulfillment, and more. It is impossible for many of the third-party sellers that Mohawk’s brands compete with to replicate what AIMEE is able to do.
Mohawk currently has over 1,000 SKUs across 12 brands that sell DTC primarily on Amazon, Walmart, and Shopify. The growth that Mohawk has been able to achieve speaks to the success of the AIMEE platform, as the company has nearly tripled its number of products with over $500K in sales over the last 2 years.
Source: Mohawk Investor Presentation
Mohawk leverages AIMEE to launch new products organically and acquire existing products at accretive multiples of generally 3x-4x TTM EBITDA. As previously mentioned, there are a large amount of small third-party sellers on marketplaces like Amazon and Walmart that have built successful businesses but lack technology and scalability to compete long-term. Many of these small businesses are looking for a successful exit strategy but are not big enough to be acquired by large CPG companies. Mohawk uses AIMEE to decipher which products would make successful acquisition targets and is able to integrate and onboard these new products to AIMEE in as little as 48 hours post-acquisition.
Marketplacepulse projects GMV in the 3PS (third-party seller) space to grow at a CAGR of 16.3% from 2019-2025. Mohawks plans to continue to use its accretive M&A strategy to opportunistically add new products and categories through acquisitions. There is potential for equity dilution as a means to finance future M&A deals, but it is important to understand that any equity dilution will be accretive. Shareholders should not be concerned about equity dilution at very accretive multiples because these acquisitions will unlock shareholder value.
Many of Mohawk’s acquisitions are financed through equity and/or debt. The company recently announced that it is refinancing all its outstanding debt with a $110M senior secured note at an 8% annual interest rate with warrants convertible to equity. This refinancing deal represents an improvement in funding with a reduced annual interest rate.
Financials
For the FY 2021, Mohawk is guiding for $365M in revenue at the midpoint of its projection, representing 96% YoY revenue growth. This growth rate represents an acceleration from the 62% YoY revenue growth Mohawk recorded in 2020.
In 2020, Mohawk recorded its first full year of positive EBITDA with $2.5M. The company is guiding for $32M of positive EBITDA at the midpoint of its 2021 projection, or nearly 13x YoY growth.
Management is targeting an 8%-10% EBITDA margin for the full year, a significant improvement from the 1.3% EBITDA margin the company recorded in 2020. Long term, the company is targeting a 13%-15% adjusted EBITDA margin.
Analysts are projecting Mohawk to reach bottom line profitability for the first time in 2021 with a $0.08 FY EPS estimate, up from -$0.18 in 2020. The company has seen a significant improvement in its margins over the last year and management expects continued margin improvement in 2021.
Going into 2021, Mohawk is showing strength and positive momentum in the fundamentals. Revenue growth is expected to accelerate 34 percentage points to 96% YoY while the company is guiding for 13x EBITDA growth YoY.
Analysts are projecting Mohawk to reach EPS profitability for the first time in 2021 with improving gross margins, operating margins, and free cash flow.
Analysts are currently projecting MWK to grow revenue 26% YoY in 2022. After its Q4 earnings report, MWK raised 2021 revenue guidance 12% above consensus. The company has not guided for 2022 yet, but we believe the current consensus estimate from analysts is very conservative. We believe there is great potential for MWK to guide significantly above the consensus 2022 estimate as we get into the second half of 2021.
Valuation
The positive momentum in Mohawk’s fundamentals has not translated to a higher valuation recently, as MWK stock is currently trading at just 2.2x 2021 revenue.
MWK stock has seen a significant contraction in its forward multiple over the last couple months, as it is currently 45% off its peak valuation. When accounting for forward growth and improving profitability, we view MWK’s 2.2x forward multiple as an attractive valuation.
Risks
MWK has proven to be a volatile stock since we first entered, and we expect continued volatility in the future as it is a high beta small cap stock. One of the main risks for Mohawk is that the company is reliant on Amazon’s marketplace and also competes with Amazon Basics. While Mohawk uses various channels for their brands to sell products, Amazon marketplace is the most important channel. While this is a risk, most third-party sellers are reliant on Amazon to some degree and we believe it would take anti-competitive and monopolistic strategies from Amazon to dominate its own 3PS marketplace that has over 1.9M active sellers.
Mohawk’s business model also carries a degree of execution risk. The company is currently dependent on certain key products and is reliant on the continued success of these key products in the future. However, as the company continues to diversify its product portfolio, they will be less reliant on any one product or brand and this risk will be mitigated.
There is also execution risk in Mohawk’s M&A strategy as future growth is reliant on the continuation of successful acquisitions. Mohawk cited an 80% success rate on its acquisitions, meaning there is a risk that this success rate will drop on future acquisitions.
Conclusion
At a 2.2x forward multiple, we believe these risks are more than priced in to MWK’s current stock price. Mohawk has an efficient proprietary software engine in AIMEE that has demonstrated proven success in the 3PS CPG space. 2021 is shaping up to be a breakthrough year for Mohawk as they accelerate top line growth to 96% YoY and reach bottom line profitability for the first time. We believe MWK can achieve high growth for years to come in addition to profitability, and the risk/reward looks favorable at this valuation.
Poshmark sits at the intersection of three key trends: non-new, sustainability, and social e-commerce. A consumer-to-consumer online marketplace for pre-owned items, Poshmark is a fashion-oriented platform that offers apparel, accessories, beauty and wellness, footwear, home goods, toys and games, and a new pets category.
The app makes online shopping social, with a user experience similar to Etsy, Instagram, and Pinterest. Poshmark encourages users to follow each other, and like and share items for sale in users’ closets. It also offers video through Posh Stories, free virtual events known as Posh Party Live, and virtual meetups. Prior to the pandemic, Poshmark also supported in-person events.
As the largest fashion-oriented online C2C marketplace in the U.S., Poshmark’s IPO generated significant excitement. The company initially planned to offer 6.6 million shares at $35 to $39, but due to demand priced the IPO at $42.
In its first day of trading Jan. 14, the stock opened at $97.50 and closed at $101.50, with an intraday high of $104.98. The stock has been falling ever since and reached a new low March 25 when it closed under $39.
Now that the valuation has come back down to earth, Poshmark may offer a good opportunity for investors who believe the future of ecommerce will be social. Below we look at competitors, fundamental, quarterly results, market opportunity, and potential tailwinds.
Ebay Posts Record Growth
To understand the potential opportunity in Poshmark, first we need to look at one of the largest online marketplaces in the world, Ebay. As more shopping moves online, specialized ecommerce platforms like Poshmark are fighting for current and potential Ebay customers.
Founded in 1995, Ebay is the grandfather of the online auction. Like its much larger rival, Amazon, Ebay facilitates B2C and C2C sales through its website and makes money on transactions. Unlike Amazon, which has strict guidelines around used items, sellers can list almost anything on Ebay.
But it has faced stiff competition from a new generation of online marketplaces that cater to niche interests, including public companies like Poshmark, Mercari, and The RealReal, which encourage users to clear their closets to make extra cash.
In the universe of private companies, there is also a platform for every niche, from gently used children’s apparel on Kidizen to used tech on Gazelle.
After years of declining growth, Ebay may have turned a corner last year. Due to tailwinds from Covid-19 and the resulting economic lockdown, the company reported double digit revenue growth in 2020. Here are the full year 2020 highlights:
Revenue was $10.3 billion, up 19% on an as-reported basis.
Gross merchandise volume (GMV) was $100 billion, up 17% on an as-reported basis and an FX-Neutral basis.
GAAP and non-GAAP operating margin were 26.4% and 31.3% respectively.
Due to a strong holiday season, Ebay also reported strong Q4 results:
Revenue of $2.9 billion, up 28.1% YoY, beat expectations by $160 million.
Non-GAAP EPS of $0.86 beat by $0.03.
GAAP EPS of $1.12 beat by $0.48.
GMV was $26.6 billion versus consensus of $25.18 billion.
Annual active buyers grew 7% to 185 million.
Still, this pales in comparison with high growth e-commerce marketplaces, not all of which are young companies.
Overstock, founded only a few years after Ebay in 1999, grew 2020 Q4 revenue 84.4% YoY. Wayfair, founded in 2002, grew Q4 revenue 45.1% YoY. Fintwit favorite Etsy, founded in 2005, grew Q4 revenue an astounding 128.7%.
With the tailwinds from Covid looking ready to expire for Ebay, and the entire ecommerce sector, the market is dubious about whether Ebay can continue growth and beat tougher comps. Executives were upbeat in the most recent report, noting the progress the company made in executing on the three pillars of its long term vision:
Defend the core business by building compelling next-gen experiences.
Become the partner of choice for sellers.
Cultivate lifelong trusted relationships with buyers.
It is clear from the report that Ebay executives are aware of the risks to its core business from other ecommerce platforms. To execute on its strategic vision, Ebay is focusing on seasonal opportunities and non-new, including refurbished, which was a top trend for holiday shopping.
How Big is the Opportunity in Non-New?
The online U.S. resale market for apparel and footwear was estimated at $7 billion in 2019 and is expected to grow to an estimated $26 billion in 2023, according to data from GlobalData cited in Poshmark’s S-1.
A report last June by Poshmark competitor Thredup, which filed for IPO recently and is expected to begin trading on the Nasdaq March 26, valued the secondhand apparel market at $28 billion and predicted it would reach $64 billion within five years. It said the resale market grew 25 times faster than the overall retail market in 2019, with an estimated 64 million people buying secondhand products.
Good opportunities attract competition, and competition for the online secondhand apparel and accessories market is fierce.
In addition to Poshmark, Depop, Grailed, Mercari, Thredup, Tradesy, The RealReal, other notable competitors include Vestiaire Collective, a French company that recently raised $216 million in fresh funding, and Vinokilo, a German company that has not raise any venture capital and has been consistently profitable.
Luxury brands and platforms are also starting to consider controlling the lifecycle of their own products. For example, luxury marketplace Farfetch launched Farfetch Second Life in November 2020. It allows customers to trade in high-end bags in exchange for a credit to shop new collections.
Authentication is a key feature of the luxury resale market, such as designer handbags, shoes, and apparel. As part of its strategic vision, Ebay rolled out its own authentication program for secondhand watches over $2,000 and sneakers over $100 last fall.
Based on the results, it is a potentially profitable niche for Ebay, and validates part of the opportunity Poshmark and its competitors are trying to exploit. Ebay saw a double digit increase in GMV growth in Q4 versus Q3 for watches over $2,000, while sneakers over $100 grew triple digits YoY in Q4.
Investors should note that authentication has been controversial for sites such as The RealReal, an online and brick-and-mortar marketplace that offers authenticated luxury clothing, jewelry, and watches.
The RealReal has been plagued by claims in the media, and on social platforms, that fraudulent products slip past low paid authenticators and are sold on the platform. The RealReal is also being sued by Chanel, which alleges that The RealReal is selling counterfeit Chanel bags.
Poshmark has faced similar claims from users. So far, accusations against The RealReal seem to be more prevalent and much higher profile. The potential risk is real to any company that claims 100% authentic designer goods.
Tailwinds from Sustainability
Consumers are increasingly aware of the fashion industry’s impact on the environment. The U.S. sustainability market is projected to reach $150 billion in sales this year, according to Nielsen.
In Europe, 67% of surveyed consumers consider the use of sustainable materials to be an important purchasing factor, and 63% of consumers consider a brand’s promotion of sustainability in the same way, according to July 17 report from McKinsey & Company on Sustainability in fashion.
Secondhand is inherently more environmentally friendly, as it extends the life of consumer products.
Seller Ecosystem: Size is a Moat
Sellers create marketplaces by offering the products that attract consumers. That is why one of one of Ebay’s three key priorities for its long term vision is becoming the partner of choice for sellers. In a virtuous cycle, sellers create the marketplace that keeps buyers coming back, which keeps sellers engaged.
For example, of all buyers who activated on Poshmark between 2012 and 2018, 34% also activated as sellers by the end of 2019. Of all sellers who activated between 2012 and 2018, 39% activated as buyers by the end of 2019, according to the company’s S-1 Registration Statement.
For sellers, every marketplace has advantages and disadvantages. Poshmark’s fees are less complicated than Ebay’s but significantly higher:
· Poshmark. For sales under $15, Poshmark charges a flat rate of $2.95. For sales above $15, the fee is 20%.
· Ebay. Ebay has been working to simplify its notoriously complicated fees. For most categories on Ebay, managed payments customers pay 12.35% up to $7,500, plus 2.35% on the portion of the sale over $7,500.
Poshmark has been criticized for its high fees. But the company acknowledged in its S-1 the potential for future reductions:
“In the future, we may be unable to attract new sellers or retain current sellers at these fee levels, as they may choose to sell their merchandise on other platforms with lower fees. Furthermore, pricing pressures and increased competition generally could result in having to decrease fees, which could cause reduced revenues, reduced margins, or losses, any of which would harm our business, results of operations, and financial condition.”
For Ebay, size is a moat. With its gargantuan user base, that moat is not easy to disrupt. The same may be true of Poshmark, which is the leading C2C marketplace for fashion, according to data from May 2020 from Statista, a German company that specializes in market and consumer data.
Founded in 2011, Poshmark has grown significantly larger than other fashion oriented secondhand marketplaces, most of which were founded around the same time.
Notable competitors in secondhand fashion include Depop, founded in 2011; Grailed, founded in 2014; Mercari, launched in the U.S. in 2014; The RealReal, founded in 2011; Thredup, founded in 2009; and Tradesy, founded in 2009.
Mercari, a Japanese company, had 3.4 million monthly active users in 2019, according to a company press release. It can be difficult to sell on platforms with much smaller user bases, although it helps to offer desirable brand names, according to user reviews.
Some sellers dislike Poshmark’s social aspects—it creates extra work by forcing sellers to like and share items, and negotiate with potential buyers—the size of the marketplace means sellers and buyers keep coming back. In 2020, Users who spent an average of 27 minutes daily on the app continue to re-engage over time as buyers and sellers, according to Poshmark’s Q4 report.
Fundamentals: User and GMV Growth
Poshmark launched in the U.S. in 2011 with a valuation of more than $600 million. The company has an asset light model and does not own or manage inventory, as items are listed, sold, and shipped by sellers.
In May 2019, Poshmark expanded to Canada, growing its community to more than 1.4 million users in that country within the first year.
International GMV was $6.4 million in 2019, according to the company’s S-1. It grew to $32.6 million in the nine months ended Sept. 30, 2020. For each of these periods, revenue from international operations was less than 10% of the company’s net revenue.
As of Sept. 30, 2020, Poshmark had 31.7 million active users in North America, 6.2 million active buyers, and 4.5 million active sellers, according to the S-1.
Executives did not update the total number of active users or active sellers in the Q4 report. It did note an increase in active buyers to 6.5 million, a 20% increase YoY from 5.4 million in Q4 2019. Social interactions also grew 48% to 30.4 billion in 2020, according to the Q4 report.
Poshmark Active Buyers (Thousands)
Source: S-1
Poshmark doubled the number of active buyers from June 30, 2018 to June 30, 2020, which it says has been a key driver of GMV growth.
GMV in Millions
The company plans to continue growing through increased engagement, new product categories, and international expansion, starting with English-speaking countries. Last month, Poshmark launched in Australia.
Poshmark chose Australia as its first market outside of North America due to the well-established thrift shop culture, high rates of e-commerce adoption, environmentally conscious consumers, said Chief Executive Officer Manish Chandra, in an interview with Bloomberg.
Quarterly Results and Valuation
Poshmark had a market capitalization of $3.35 billion and an enterprise value-to-sales ratio of 12.60 as of March 24. The company reported Fiscal Q4 2020 earnings March 11 for the period ending Dec. 31.
In Q4, Poshmark achieved its third consecutive quarter of profitability and had revenue of $69.3 million, a 27% increase from $54.7 million in the fourth quarter of 2019, according to the report.
Income from operations was $1.6 million, compared to a loss of ($15.1) million in the fourth quarter of 2019. GMV was $387.2 million, an increase of 28% YoY from $302.1 million in Q4 2019. Quarterly GMV has increased YoY for the past 11 quarters.
Adjusted EBITDA was $4.2 million which increased from a loss of ($12.6) million in the fourth quarter of 2019. Adjusted EBITDA margin was 6.1%.
GAAP diluted net loss per share attributable to common stockholders was ($0.31). Non-GAAP diluted net income per share to common stockholders was $0.05 a share and excludes non-cash expenses related to convertible notes and warrants due to the increase in the fair market value of our common stock share price.
For the full year 2020, income from operations was $23.4 million, compared to a loss of ($49.8) million in 2019. Net revenue was $262.1 million, a 28% increase YoY from $205.2 million in 2019.
GMV was $1.4 billion, an increase of 29% YoY from $1.1 billion in 2019. GMV has increased YoY since the company was founded in 2011.
Trailing 12 months Active Buyers reached 6.5 million in the fourth quarter of 2020, a 20% YoY increase from 5.4 million from Q4 2019. The company did not update the number of active sellers. Adjusted EBITDA was $34.3 million which increased from a loss of ($37.1) million in 2019. Adjusted EBITDA margin was 13.1% in 2020.
GAAP diluted EPS attributable to common stockholders was $0.22. Non-GAAP diluted net income per share to common stockholders was $1.25 a share and excludes non-cash expenses related to convertible notes and warrants due to the increase in the fair market value of our common stock share price, and the impact from the undistributed earnings attributable to participating securities.
Cash, cash equivalents, and marketable securities were $262.1 million as of Dec. 31, 2020. During the third quarter, Poshmark issued a $50.0 million three-year convertible note which converted into 1.4 million shares of Class A Common Stock upon completion of the IPO on Jan. 14, 2021.
Guidance for Q1 2021 is $76.5 at the midpoint versus $80 million expected, with adjusted EBITDA of $1.5 million at the midpoint.
The company plans to continue executing on its four growth strategies: focus on innovation to drive user engagement, growing international footprint and capability, growth through category expansion, and deliver robust, easy-to-use, effective seller services, according to the report.
As part of that plan, in 2020 the company launched two new product categories: Beauty & Wellness and Toys & Games and launched several new features. Poshmark also completed the rollout of “Posh Stories,” the company’s first video feature which enables sellers to showcase and sell their listings with short videos and photos, released “Drops Soon,” feature that allows Poshmark sellers to pre-market items not yet available for purchase, and launched Reposh, a feature that provides users with a one-click way to resell items purchased on the marketplace.
Conclusion
Poshmark is the largest online C2C marketplace in the U.S. that specializes in fashion, in a space with fierce competition. Its success is not limited to the U.S. After expanding to Canada in 2019, Poshmark grew its community there to 1.4 million users within the first year. Users apparently enjoy the social aspect of the platform, which uses an asset light model that been profitable for the last three quarters.
The pandemic has created uncertainty for Poshmark, and the entire ecommerce sector. But with the recent expansion to Australia, and the launch of new categories and features, Poshmark has room to grow. It benefits from long term tailwinds, including an increased interest among consumers in sustainability and the rise of social commerce.
Some investors have criticized the company’s social platform, saying it is a waste of time for sellers who will leave the platform. Poshmark has also been criticized for its high fees. We think these are relatively minor complaints about a platform with a record of success.
Any company can lose market share to competitors. But Poshmark’s competitors have a lot of catching up to do. Now that the valuation has come down to earth, and sentiment with it, the stock may provide a good long-term opportunity—even if the growth is not what hypergrowth investors are used to.
Disclaimer: This article represents the opinion of the writer, who may disagree with the official position of Beth Kindig and I/O Fund. Jessica Ablamsky does not currently own shares of Poshmark but may initiate a position within the next 72 hours. Beth Kindig and the I/O Fund does not currently own shares of Poshmark. The content in this article is intended to be used for informational purposes only. The author has not received any compensation from any third party or company discussed in this article. The content is the expressed opinions of the author and is intended for educational and research purposes. Any thesis presented is not a guarantee of any particular stock’s future prices, so please factor this risk into your own analysis. It is very important that you do your own analysis before making any investments based on your personal circumstances. The author is not a licensed professional advisor. Please seek counsel form a licensed professional before acting on any analysis expressed in this article, to see if it is appropriate for your personal situation.
One key area for businesses of all sizes moving forward is the ability to leverage data and incorporate insights from that data to make important business decisions. This is especially true for smaller and mid-sized e-commerce businesses selling on Amazon, Shopify, and Walmart. Many third-party sellers lack the ability to scale their businesses beyond a certain size. This is where companies like Mohawk come in with the ability to make accretive acquisitions and acquire brands with marketplace dominance to help scale these businesses.
Mohawk’s proprietary AI-based software AIMEE drives new product development, automates sales and marketing, and manages the product life cycle. The software utilizes data analysis to streamline a number of different tasks including product selection, new product launches, forecasting, marketing variables, pricing and media buying decisions in real-time, ROI tracking of investment, and more.
Mohawk has its own platform and fulfillment capabilities in place to manage the entire product life cycle from procurement and manufacturing to shipping.
Mohawk serves the rapidly expanding e-commerce and DTC markets. The company does not have many limitations on the product categories that they choose to pursue or the marketplaces they choose to operate on. The company currently has over 1,000 SKUs across 12 brands that sell DTC on Amazon, Walmart, and Shopify. Management noted an 80% success rate on products going from the launch phase to the sustain phase, which they expect to reach within 3 months of the initial launch.
Mohawk plans to ultimately grow its portfolio to include thousands of unique products with profitable and recurring revenue streams that are managed entirely by AIMEE. Mohawk intends to grow through the creation of its own new brands organically and through its accretive M&A strategy targeting smaller 3PS sellers that lack the ability to scale their businesses. Mohawk will continue to target brands that lack the resources to effectively scale beyond a certain point. Once acquired, Mohawk states it is able to integrate new brands with AIMEE as early as 48 hours after completion.
2021 is projected to be the strongest years in Mohawk’s history from a fundamental perspective.
Accelerating Revenue Growth
2021 is projected to be Mohawk’s best year for revenue growth.
Expecting to Reach Profitability in 2021
Mohawk is projecting to breakeven on EPS in 2021.
Improving gross margins
Improving Free Cash Flow and Already Free Cash Flow Positive
Operating Margins Improving, although still not positive
From a fundamental perspective, 2021 will be Mohawk’s strongest as a public company. The acceleration to 87% YoY revenue growth along with EPS profitability are two important factors that could drive the stock price higher this year.
Additionally, Mohawk is already FCF positive and has continued to improve its gross margins over the last several quarters. Operating margin remains negative at -19.5%, but we note that Mohawk has also seen a big improvement in this number in its most recent quarter.
In the midst of the recent tech rout, MWK’s valuation has contracted, and the stock is now trading at 3.3x 2021 revenue. This is an attractive multiple for a company that is projected to grow 87% this year, reach EPS profitability, and is already FCF positive.
MWK stock has exhibited relative strength during the recent tech pullback and is set to announce earnings AH Monday.We are monitoring for an entry as we believe 2021 will be an outstanding year for Mohawk, and there is ample room to grow from the company’s current ~$1B market cap.
As the market attempts to sort the companies that have temporary covid tailwinds from the more permanent and long-lasting growth, we want to separate Shopify from the pack. You can view our October 2019 analysis here where we discussed the strength of the company’s product-market fit and the catalyst of the Fulfillment Center.
One major update from the last report is that Shopify overtook eBay as the largest online retailer in the United States. When our last report was written, Shopify was the third largest retailer and a sizable portion of our analysis focused on eBay as the one to overtake.
I think we will see Shopify significantly close the gap due to Shopify's global opportunity. Shopify is more localized by allowing the merchant to have a localized domain rather than weaken under one domain as detailed in the October 2019 analysis.
Amazon is customer-centric which sacrifices the merchant-side of the equation. We covered this in 2019 when we stated:
Shopify counts over 800,000 merchants as customers compared to Amazon’s 5 million marketplace sellers. Shopify charges the sellers 2-3% compared to 26.5%. Amazon is also predominantly a United States presence with about 3⁄4 of sales occurring domestically. Shopify does not break out these numbers but it is widely understood to have a global strategy.
As mentioned previously, an important distinction between Shopify and Amazon is that Shopify places the importance on the merchant while Amazon places the importance on the retail customer. While Amazon builds out 1-day shipping, Shopify is building out tools for platforms and tools for merchants.
Amazon’s main value proposition is the convenience, which is why we will likely see Shopify attack this at various angles over the next few years (starting with the Fulfillment Network). Amazon’s e-commerce moat is about the same as Wal-mart’s retail moat; they are behemoths but these behemoths can be disrupted. Amazon took market share from Wal-Mart, and nearly two decades later, we think Shopify is a serious contender to Amazon.
However, it should be noted by not providing the traffic for the merchant, Shopify’s GMV is substantially lower than Amazon’s. We noted this before in the 2019 write-up:
Shopify makes 2.63% of GMV, or $361M of the $13.8 billion. Compare this to Amazon.com who makes 26.7% of GMV ($42.7 billion on $160 billion GMV, in 2018) and eBay who makes 11.7% of GMV ($10.86 billion on $92.6 billion, in 2018).
Percentage of GMV illustrates the power of owning the domain …
How will Shopify catch-up to Amazon? Two specific ways.
1. International Growth: Globally, Shopify has a better chance of penetrating various regions as the merchants (and lack of walled garden) localizes the content and offerings. There is also stigmatism towards Big Tech globally and Shopify works quietly in the background while letting the merchants remain in the spotlight. This will be popular globally — and perhaps even domestically if Shopify can deliver on the Fulfillment Center and close the gap on convenience. Point being, keep an eye on Shopify’s international growth.
The best evidence for this is Shopify’s recent partnership with AliPay. Although this does not meaningfully contribute to revenue right now, it could by next year across the key markets mentioned the press release: The new Alipay payment gateway is available now to Shopify merchants in the U.S., with more markets to come in the future, including Hong Kong, India, South Korea, Indonesia, the Philippines, Malaysia, Thailand, Pakistan, and Bangladesh.
Right now, it’s hard to predict Shopify’s success with AliPay in these regions but it’s easy to see that Shopify is welcomed in geographies where Amazon is not. Therefore, we see global as an important piece to our thesis as merchants who want to reach global audiences will likely choose Shopify over Amazon. We think this is an important competitive edge.
2. The merging of social media and e-commerce as a means for monetization. We’ve belabored the point of Apple’s IDFA changes to first-party vs third-party ads. For social media companies, the answer to weaker data will be to move away from behavioral targeting for ads and move towards direct response and e-commerce. Amazon is weak here as social media companies don’t partner with the behemoth (see below for SHOP’s partnerships). Expect to see additional tailwinds from social media driving more e-commerce traffic.
Market Forces: e-Commerce is eating Retail
There are two market forces driving the success of Shopify right now. The first is the covid pandemic grew ecommerce penetration in the United States from 15% to nearly 35% representing the same level of growth (3X) as the previous ten years combined (5% to 15%). Retailers are now online in an unprecedented number and are able to successfully compete with Amazon.
The more permanent trend will be driven by Millennials and Gen Z with 91% and 89% stating that they shop online, respectively, according to a survey conducted in June. Additionally, data from Morgan Stanley shows Millennials and Gen Z will overtake Baby Boomers as the dominant US spenders in the coming years, meaning the major US consumers of the future will prefer to shop online.
The additional outside force is the remaining addressable market. The statistics above suggest e-commerce will overtake retail while data from Stripe suggests only 5% of global commerce happens online today. This will be compounded by the overall growth in retail.
To summarize, we think the transition towards e-commerce is more permanent long-term than the market is pricing in at this time as retailers have been forced to adopt online stores and younger generations prefer this method.
Below you can see what product-market fit looks like as Shopify takes over eBay in a banner year for e-commerce.
Fundamentals:
In its most recent quarter, Shopify grew revenue 96% YoY to $767.4 million up from $714.3 million in the previous quarter and $390.6 million in the year-ago quarter. GMV grew 109% which was slightly down from the previous quarter of 119% GMV growth.
Merchant solutions revenue increased 132% YoY while subscription solutions advanced 48%. EPS of $1.13 came in 122% above the consensus estimate calling for $0.13 as the company showed its ability to earn sizable profits. Adjusted operating margins of 17% and is up from 3% in the year-ago quarter.
TTM revenue was $2.5 billion, net income of $196.5 million, and adjusted net income of $342.5 million. Here is the company’s growth over the last few quarters:
Revenue $390.6 million $505.2 million $470 million $714.3 million $767.4 million
Revenue Growth (y-o-y) 45% 47% 47% 97% 96%
Heading into Q4, Shopify is on pace to record over $100B in GMV in 2020. The company has over 1 million merchants in 175 countries with a breakdown of United States of America 52%, United Kingdom 7%, Canada 6%, Australia 6%, and 29% rest of the world.
Monthly recurring revenue as of September 30, 2020 was $74.4 million. The company has cash and marketable securities of $6.12 billion and debt of $750.5 million.
The increase in cash was due to $2.03 billion of net proceeds from Shopify’s offering of Class A subordinate voting shares and convertible notes in the third quarter of 2020 and $1.46 billion of new proceeds from Shopify’s offering of Class A subordinate voting shares in the second quarter of 2020.
An early glimpse into Q4 shows Shopify is likely to have a big quarter as the holiday shopping season unfolds. The company announced record Black Friday sales of $2.4B, up 75% from Black Friday 2019.
Over the past two years, Shopify has doubled its share of Black Friday sales. Most impressive is the acceleration of market share gains the company demonstrated this year.
The median analyst forecast for FY 2020 is $2.85 billion (up 81% YoY) and for FY 2021 is $3.74 billion (up 31% YoY). The median analyst’s EPS estimate for FY 2020 is $3.70 to $3.31.
The harder comps for next year is one reason the stock has cooled off but I suspect that we will see stronger forward guidance as the year goes on.
Here is how Shopify’s forward growth next quarter compares to other popular e-commerce companies:
Fulfillment Center
In June 2019, Shopify introduced the Shopify Fulfillment Network, a fulfillment network that will offer timely deliveries, lower shipping costs, and provide a better customer experience for merchants and customers Last year, the company acquired 6 River Systems to help build out its warehouse automation technology.
The Shopify Fulfillment Network is a 5-year build process for Shopify that remains in the product market fit phase. At this point, Shopify is focused on building out the software but management expects to prioritize the build out into 2021.
“our focus in 2020 around SFN is to achieve product market fit, which we plan to continue up to — into 2021. We want to ensure that the foundation of the fulfillment network is strong and the merchants experience is outstanding before we enter sort of the scale phase.”
Shopify is focused on the long-term opportunity and does not expect to accelerate its SFN investment, as they want to take their time on such a large venture ($1B).
Ultimately, the Shopify Fulfillment Network will utilize machine learning to improve supply chain economics and logistics. The company believes a significant portion of US GMV is addressable by the Shopify Fulfillment Network.
This will help Shopify compete with Amazon as a value add for merchants to make deliveries more streamlined and cost-effective, and will also improve the customer experience for buyers by ensuring faster deliveries.
Other tools and services that Shopify provides includes Shop Pay and Shop Email. Shop Pay allows customers to check out faster the next time they shop by saving the email address and credit card information. More than 60 million buyers opted-in at the end of Q3. Keep an eye on this for an indication of strength under-the-hood.
Shop Email lets subscription plans send emails through Shopify’s system rather than adding another vendor for email.
Notable Partnerships including Social Media
Shopify has several major partnerships that differentiate its platform from competitors. One is Shopify’s sales channel integration with Instagram that allows merchants to sell directly to consumers through product tagging. This allows shoppers to discover and purchase products all within the Instagram app, shortening the path to purchase.
Instagram is a crucial component of a successful ecommerce marketing strategy as it is the 5th most popular app in the US. Shopify’s integration with Instagram allows merchants to market their products and sell those products directly through the app.
Shopify is also partnered with Wal-Mart which was recently announced in June. The deal opens Walmart's Marketplace to Shopify's small business sellers, giving these merchants access to sell their products on the 4th largest ecommerce marketplace in the US.
Early indications show that Walmart Marketplace seller additions have increased 3x from January, demonstrating that Shopify merchants are eager to take advantage of this new opportunity.
A third major partnership Shopify has is with Facebook, recently announced in May. In Facebook’s expansion into ecommerce, they partnered with Shopify to launch Facebook Shops. Facebook Shops is a free tool designed to help merchants create customized online storefronts for Facebook and Instagram. This partnership allows Shopify merchants to control customization and merchandising for their storefronts inside Facebook and Instagram while managing their products, inventory, orders, and fulfillment directly from within Shopify.
Shopify is also partnered with TikTok which was announced in October. Shopify’s new channel integration with TikTok allows sellers to connect their TikTok for Business account and feature in-feed shoppable video ads within Shopify.
Shopify merchants can easily download the TikTok channel app from Shopify’s app store and begin to run and optimize TikTok marketing campaigns straight from the Shopify platform. For now, the TikTok channel is available in the US, but sellers in other North American countries as well as Europe and Southeast Asia will be able to access the service in early 2021.
TikTok was the 2nd most downloaded free app in 2020 with a surging young audience that ecommerce companies covet. Shopify merchants are now able to tap into that global audience.
These partnerships represent a tremendous value-add for merchants and prospective merchants, giving Shopify a big advantage over competitors. At this point, an entrepreneur looking to sell products online is likely to choose Shopify for the reach the company offers, as well as the tools Shopify is frequently releasing (SFN, Shop Pay, Shop Email, etc).
Valuation
SHOP continues to trade at a premium – 32x 2021 revenue, which has remained relatively stagnant over the last five months. In comparison to peers, many of which have seen their valuations continue to climb, Shopify has become more attractive.
In July, SHOP briefly had the highest forward multiple among SaaS stocks. It is now outside the top 10.
Here is the adjusted valuation EV/1-year forward revenue when adjusted for the 3-year growth rate. This helps to put the valuation in better perspective for Shopify.
Below is how Shopify compares on sales efficiency which measures the output of sales and marketing compare to annual recurring revenue. A ratio above 1 indicates a sustainable business model.
Also, here is a comparison looking at consensus projections 2 years out. We feel that Shopify can easily clear these 2-year projections.
Analyst Statements:
SHOP has 14 buy/outperform recommendations, 18 hold recommendations, and 3 underperform/sell recommendations.
Wedbush analyst Ygal Arounian raised the PT of Shopify to $1,300 from $998 in September. “We continue to like the short-term trends and Shopify’s position to capture them, but this call is a longer-term one in addition to those trends, driven by Shopify’s position to capture share of the total retail [addressable market] as it builds out its retail OS,” he wrote.
KeyBanc Capital Markets analyst Josh Beck, who has an overweight rating on the stock, raised the PT from $1,150 to $1,250, said the Shopify Fulfillment Network, which was launched last year, "is a full-fledged, tightly integrated fulfillment solution for Shopify merchants and includes order/inventory management solutions, branding and data controls, and access to scalable, flexible warehousing space to sell across multiple channels."
Morgan Stanley analyst Keith Weiss said “We see SHOP growing the merchant base from 1 million today to 4.6 million by 2030 (Subscription Solutions reaching $4.2 billion), while also expanding the take rate and further powering the Merchant Flywheel (GMV reaches $737B, Merchant Solutions grows to $21 billion),” he said.
12/4 – Cleveland Research Initiated Shopify with a Buy. The analyst expects Subscription Solutions and Merchant
Solutions to experience growth better than consensus expectations in FY22
12/2 – Susquehanna Initiates Shopify at a Hold stating, “The company’s two revenue units of Subscription Solutions and Merchant Solutions have different revenue drivers and can be compared to (mostly) pure-plays in the market. For each business unit, we use a price-to-sales growth valuation given SHOP's high revenue growth levels vs. peers. We value Subscription Solutions at $200 per share and Merchant Solutions at $750 per share."
12/1 – Credit Suisse Rates Shopify Neutral with $1,100 PT, stating “Our $1,100 target price and Neutral rating for SHOP is based on our DCF analysis and implies a 2021 EV/Revenue multiple of 33x. While we remain positive on SHOP given numerous LT drivers, including: the secular shift to eCommerce, Shopify Plus, International, and adoption of additional merchant services (such as Fulfillment) we see risk reward more balanced at these levels.” 11/19 – Jefferies Upgrades to Buy from Hold stating: "We have a greater appreciation for SHOP's ability to deliver robust growth for the next several years and reach ~$10B of revenue in 2025 powered by a structural pull forward in e-commerce activity and better monetization of gross margin value."
10/30 – Argus Rates Shopify Buy with $1,200 PT stating “Although SHOP has run up sharply year-to-date, the company has a strong runway for growth in the small to mid-sized merchant market, which is only lightly penetrated.”
This article was originally published on Forbes on Oct 29, 2020,11:49pm EDTForbes on Oct 29, 2020,11:49pm EDT
Before breaking out the earnings reports from the high-growth universe, here are the results from Big Tech earnings today. Each company beat on both the top and bottom lines. Other than Alphabet, they are all trading down after-hours following these results as the market digests the magnitude of the beats, and in Apple's case, the lack of guidance.
Snap:
Snap reported Q3 results on October 20th, beating both the top and bottom lines. The ongoing recovery of advertising budgets helped to boost Snap's revenue growth to 52% YoY in Q3, which now sits just below the 58% pre-COVID growth rate the company recorded during Q1.
Notably, the reacceleration that Snapchat reported is the highest Q3 growth rates since 2017. According to management, some of the user growth highlights from this quarter include Lens Studio, which saw creative applications to use AR as a way to try-on products from brands including Sally Hansen for nail polish and Champs for sneakers.
Other product features released contributing to this quarter's beat include Brand Profiles, Minis, Places on the Map, Dynamic Ads, Bidded AR Lenses, Dynamic Lenses, Camera Kit, Snap ML Lenses including the Anime Lense.
The company also attributes the growth to linear TV and sports being featured on the social media platform at a time when content is seeing a surge.
Here is what the company said about Dynamic Ads and AR Ads on the earnings call:
For example, last quarter we launched Dynamic Ads globally, which combine product catalogs with our optimization capabilities to reward advertisers who invest in our platform with ROI at scale, and we are already seeing strong adoption rates from Retail, CPG, Restaurant, and Gaming verticals, among others.
While Dynamic Ads recommend items to Snapchatters based on their interests, AR try-on takes this a step further and allows Snapchatters to visualize the item in real life. For example, Clearly, an eyewear retailer, leveraged our sponsored AR Lenses to enable our community to try on different pairs of glasses, which resulted in 33 seconds of average playtime and a 5.3% share rate. Clearly was able to drive a full-funnel impact for their brand, achieving a 7-point lift in brand awareness and a 5-point lift in brand consideration while also driving a 46% lift in unique page viewers on their site and a 3.3% lift in purchases.
Daily active users rose 18% to 249M, topping the consensus of 243M. For user base demographics, Snapchat reaches over 90% of Gen Z and 75% of Gen Z and Millennials in the United States, the UK and France. This is one reason the company believes its augmented reality platform is seeing early success with brands as this demographic is more likely to engage with AR advertisements. Snapchat also has a gaming platform with new releases every quarter.
The majority of Snap’s growth came from the Rest of World category, at 43% growth. North America grew 7% and Europe by 10%. Meanwhile, North America and Europe carried the majority of the revenue growth at 56% year-over-year and 49% year-over-year, respectively.
Snap also recorded its most successful quarter ever in terms of monetizing its user base with a global ARPU of $2.73, coming in well ahead of the $2.23 consensus estimate.
Even though the company did not offer guidance for Q4 due to COVID uncertainties, SNAP stock surged over 20% following the results. Kids being schooled virtually, especially college-aged, is likely contributing to the company’s record Q3 usage and monetization.
Pinterest:
Pinterest rose with Snap following Q3 results as investors anticipated a similar recovery in ad spend for the social media company. The company delivered outstanding Q3 results that easily cleared consensus expectations.
Total revenue rose 58% YoY in Q3 with 49% growth in the US and 145% growth internationally. Monthly active users jumped 37% overall to 442M and ARPU rose 15% (US +31% and international +66%) to $1.03.
Perhaps most impressive was management’s 60% YoY growth guidance for Q4:
Additionally, we expect our business to maintain its momentum in Q4, with revenue growing around 60% year-over-year.
And then finally, this brand safety concept, especially post-July and the boycotts that we saw, I would imagine that we're seeing a sustained benefit just due to the election season. But I think it's a secular trend where advertisers want to be around positivity as they build their brands, and that that's contributing to our growth as well. That's what we're hearing.
Management did state there is a level of uncertainty with this guidance due to Covid and tailwinds the company saw from being “brand safe” during the election (i.e. attracting ad spend typically given to Facebook).
Here is what the company said when asked if the beat came from factors inherent to the product or due to the macro conditions of ad spend being thin in Q2.
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Yes, I mean, Ross, it's really hard to parse. I mean, I would love to be able to disaggregate that and say, we're getting X amounts from the technology investments we've made. We're getting Y amounts on demand returning from a macro perspective, or insights give us a certain amount and the brand safety equates to the remainder, in reality, it's the combination of all the above. Ads are working. I think we went through this a little bit on Brian's question, but making it easier for especially medium-sized advertisers to on-board and automate spending their budgets effectively against their desired online conversion and sales objectives has been a big driver for us …. [some parts omitted here for brevity]
So it's a mix of product and technology, macro recovery, the insights that we're able to deliver, and the brand safety and positivity that Pinterest uniquely brings and the world of social media.
Twilio:
Twilio pre-announced Q3 revenue would come in ahead of previously issued guidance from the company of $401 million to $406 million, with analyst consensus at $404M. Expectations were already high going into the earnings report and Twilio went on to beat revenue estimates by 10% for revenue of $448 million and growth of 52% year-over-year. This was the largest beat by dollar in Twilio’s history, as referenced by analyst Khozema on the earnings call.
Twilio also handily beat on earnings at $0.04 EPS compared to analyst consensus of -$0.03 EPS.
For Q4, Twilio expects revenue of $450M-$455M (37% YoY growth) vs. consensus of $432.1M. The net retention rate came in at 137% for TWLO in Q3. The guidance the company provided for earnings next quarter did not match expectations with an operating loss ranging between $10 to $15 million.
Twilio is on an expansion streak fueled by acquisitions. The company completed the acquisition of SendGrid in early 2019, launched the Flex platform, and has now acquired Segment to “enable developers and companies to unify customer data from every touchpoint.” The guidance provided does not include Segment which is expected to close in the current quarter and will modestly impact the top and bottom line.
On the earnings call, the company highlighted the importance of health care with Twilio’s products:
In healthcare, the innovative solutions that have been built on top of Twilio to address the COVID-19 crisis, provide an opportunity for the industry to advance the use of technology to better deliver outcomes for patients and create tools that fit seamlessly within a physician's workflow. This has always been the vision, but the coronavirus crisis highlighted the urgency, immediacy, and magnitude of that need.
Most importantly, CEO Jeff Lawson and the management does not see these trends slowing down with a vaccine or return-to-normal and specifically addressed this:
The other thing I would just point out, though, is that some of the acceleration that we've seen, for example, in healthcare and education, e-commerce, but we also think that those use cases are going to be pretty resilient. I don't think they're going to be ephemeral at all. In fact, I think we see a lot more opportunity in some of those industries. And so I think that's going to provide ongoing tailwind over the medium-term as well.
You can access the Investors Day presentation here where the company guided for 30% growth over the next 4 years.
Shopify:
Shopify announced outstanding Q3 results, with revenue growth of 96% year-over-year and Gross Merchandise Volume growth of 109%. The revenue number came in 18% above consensus estimates while GMV was 13% above forecasts.
The company announced subscription revenue grew 48% during the quarter, merchant revenue rose 132%, and monthly recurring revenue grew 47%. Non-GAAP EPS of $1.13 came in well ahead of estimates calling for $0.50, and operating margin increased to 17.6% vs. an 8.7% consensus. This compares to an adjusted loss of $0.29 EPS.
Shopify gave away a 90-day free trial with this cohort transitioning from a free trial to paid merchants in Q3, which had a “double cohort effect” on merchant revenue growth of 132%. The company does not expect the Q4 demand for subscriptions on a year-over-year MRR growth rate to match Q3. This note was addressed by Amy Shapero, CFO, in the earnings call:
So, I want to just highlight that we did have a record quarter in Q3 for merchant growth due to the double cohort effect that I talked about in my opening remarks. But I think it's really important to emphasize that even excluding the 90-day free trial as who converted in Q3, we still would have seen an acceleration in our merchant growth over pre-COVID levels, which tells you that more merchants are coming to the platform with this shift to online commerce and COVID.
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The free trial was addressed again here as to how the key metrics compare to the 14-day trial with lower conversions but higher retention:
So, the new store creations in Q2 were the new stores coming on the platform associated with the 90-day free trial. So, we were not able to count them as merchants in Q2. We saw many of them convert to paying merchants in Q3. The conversion rates that we've seen on the 90-day free trials is slightly lower than cohorts historically on 14 day free trials, but we think that's okay, because they're more intentional when they convert because they've had a longer time period. The data that we have in the three months in some of the earliest 90-day free trial cohorts and converted suggests that those merchants that have a higher retention than 14-day free trial. As we know, many of them coming online in Q2 were established businesses looking for a multi-channel platform. And so we believe that those 90-day free trials will be more sticky than the 14-day free trials cohorts historically.The conversion rates that we've seen on the 90-day free trials is slightly lower than cohorts historically on 14 day free trials, but we think that's okay, because they're more intentional when they convert because they've had a longer time period. The data that we have in the three months in some of the earliest 90-day free trial cohorts and converted suggests that those merchants that have a higher retention than 14-day free trial. As we know, many of them coming online in Q2 were established businesses looking for a multi-channel platform. And so we believe that those 90-day free trials will be more sticky than the 14-day free trials cohorts historically.
Notably, Shopify incredible B2B brand power with philanthropic efforts to support Black entrepreneurship with $130 million dedicated to supporting businesses with diverse ownership. The company also launched a Tiktok channel that allows merchants to market their products using TikTok for Business. The collaboration allows for in-feed video ads to expand their paid and organic reach.
Microsoft announced FQ1 2021 results on October 27th, outperforming on headline metrics led by strong Commercial Cloud and Azure growth. EPS of $1.82 came in ahead of estimates of $1.54 EPS while 12.4% YoY revenue growth represents a 4% beat above consensus.
Intelligent Cloud revenue of $12.99B was well ahead of the $12.73B consensus, while the 48% YoY growth in Azure was better than the expected 44% growth. Management issued a somewhat tepid outlook for FQ2, expecting weaker Consumer PC growth and intelligent cloud revenue in line with forecasts, along with stronger Processes and Business Productivity revenue.
The reason for the lower-than-expected guidance is due to softer business demand that will cut into Windows licensing revenue. We also saw commercial PCs crater 22% after support for Windows 7 ended and the coronavirus pandemic forced more people to work from home.
However, these are not the segments that would cause an investor to choose Microsoft as a portfolio holding. For the most part, the bull thesis centers around Azure and the line of horizontal products under the Azure infrastructure and PaaS umbrella: Azure Arc, Azure Synapse, Azure SQL Edge, Azure Machine Learning, Azure Space and Microsoft Cloud for Healthcare. Azure saw a slight acceleration of 1% this quarter. Gross margins on Commercial Cloud are an impressive 71% when including an accounting change on server equipment from two to four years.
Notably, when asked about the effects a decline in on-premise and transactional revenue could have on Microsoft, CEO Satya Nadella answered that the strategy for Microsoft is distributed computing with the public cloud and edge (and presumably these will make up for any decline seen from transitioning on-premise).
One is, the approach we have always taken is that distributed computing will remain distributed. So, the cloud and the edge is what will be the distributor fabric for applications. So, if you look at where our growth is coming from for the all-up number in Intelligent Cloud, it's coming from the infrastructure layer, the flexibility that we have around hybrid deployment, things like Azure Arc, a very differentiated. The same thing with data, that's one of the big future innovations, even in the last quarter was the ability to deploy, for example, Azure data in any cloud, including the edge.
The more interesting note came at the end of the earnings call by Brent Bracelin of Piper Sandler, who pointed out Azure had grown to 17% of revenue — larger than Windows – and up from 45% just three years ago, according to his model.
I wanted to follow up on Azure. This is a segment that’s grown now to 17% of revenue. I think, that’s up from 4% just three years ago. You talked about the number of petabyte-scale applications doubling. And from a size standpoint, it looks like in my model, Azure is bigger than the Windows business for the first time ever. My question really is around where are we at in the journey around Azure? How important is this to the Microsoft model? And ultimately, how big could it be looking out over the next three to five years?
This provided an important glimpse into Azure’s ongoing importance and the evolution of Microsoft.
BigCommerce priced today on August 4th and is scheduled to trade tomorrow, August 5th. You can view the S-1 Filing here.
Overview
Investors who missed out on Shopify will be eyeing the BigCommerce IPO although there are some important differences to consider. For the most part, the differences are seen in the financials.
Shopify has an annual run rate of $2.8 billion compared to BigCommerce at $151 million based on current quarter’s earnings. This is roughly 20 times more revenue.
Despite Shopify having 20X higher revenue, the company is also growing 3X faster at 97% year-over-year compared to BigCommerce at 31-32% year-over-year through end of June. Before covid-19, Shopify was posting growth between 45-70% compared to BigCommerce in the low 20% range – so again, about 3X more growth for Shopify.
When we look historically at Shopify, the company was growing 95% year-over-year in 2015 when reporting $200 million in revenue. Therefore, no matter how we compare the two companies, whether it’s historically during similar revenue size, pre-covid in 2019, and also post-covid in 2020, Shopify has remained nearly 3X more growth than BigCommerce and is continuing to do so at high revenue run rates.
One way to determine customer demand between competing products is to look at Google Trends. Below we can visualize the popularity of Shopify compared to BigCommerce. It’s interesting to see that BigCommerce search trends have not ticked up much in 2020.
According to the S-1 Filing, BigCommerce will report 30% to 32% revenue growth for the quarter ending June 30th with revenue expected to be between $35.5 million and $35.8 million compared to $27.2 million in the previous year. Net losses will slightly improve from $11 million same-quarter last year to between $9.4 and $9.0 million this year.
The company had a gross margin of 76.1% in 2018, 75.9% in 2019, and 76.8% and 77.5% for the three months ended March 31, 2019 and 2020, respectively. The company had a net losses of $38.9 million in 2018, $42.6 million in 2019, and $10.5 million and $4.0 million in the three months ended March 31, 2019 and 2020, respectively.
The company is reporting ARR to be roughly $151 million, which is higher than the $144 million ARR if calculated off the current quarter. This will represent an increase of 31.5% at the mid-way point, up from $115 million ARR from June 30th last year.
BigCommerce saw Essentials plans increase 33% in March, 106% in April and 86% in May. The enterprise plans increased only 14% and 13% in March and April before showing a marked improvement of 60% in May. Interesting enough, BigCommerce did not match Shopify’s offer of extending a free trial from two weeks to three months to incentivize covid conversions.
According to the filing, BigCommerce ranks second to Shopify from third-party reviews: “As of June 1, 2020, BuiltWith.com (“BuiltWith”) ranked us the world’s second most-used SaaS ecommerce platform and top five overall among the top one million sites globally by traffic, which we believe consists primarily of established SMBs.
We also were ranked the second most-used SaaS ecommerce platform among the top 100,000 sites globally by traffic, which we believe consists primarily of mid-market and large enterprise businesses.”
Ecommerce Market
There were quite a few statistics provided by BigCommerce in the S-1 filing that support growth of e-commerce, such as: “In June 2020, eMarketer predicted that U.S. brick and mortar retail spending will decline by 14% in 2020, whereas U.S. consumer ecommerce spending will increase by 18%, the highest growth rate since their coverage began in 2008.”
According to McKinsey & Company, 10 years of growth has occurred in e-commerce in the last three months with the microtrend showing hockey stick growth in Q1 2020. Evidence of this was seen in Shopify’s most recent earnings report yet BigCommerce has only accelerated from mid-20% growth to mid-30% growth.
One notable positive for BigCommerce is that Tiger Global plans to buy up to 20% of the shares. This is one reason Fastly has done well; Abdiel Capital owned a significant amount of shares relative to float helping to prop the stock price. Tiger Global Management’s interest was disclosed at the beginning of the S-1 filing.
Company Background:
The company was founded by Eddie Machalaani and Mitch Harper in 2009. It was spun off from their email marketing Software Company called Interspire which was started in 2003 by a chance meeting in an online chatroom. It also relocated the company from Sydney to Texas in 2009.
The company announced a $15 million Series A funding led by General Catalyst in August 2011. It acquired Zing, a provider of mobile retail technologies in April 2015. Later that year, the company leadership transitioned from the original founders to the current CEO and management team. In May 2018 it raised $64 million Series F investment round led by Goldman Sachs. It also opened the London office in the same year.
Growth Opportunities:
BigCommerce is focused on international expansion. The company pointed out in the S1 filing that 25% of their stores are located outside of the United States compared to 58% of ecommerce sites located outside the United States. In July of 2018, BigCommerce launched their first European team in London, and in 2019, their first Asian office in Singapore. Revenue grew 20% in EMEA and 28% in APAC in 2019.
According to BuiltWith as of January 2020, 42% of all ecommerce websites are based in the United States, and 58% are outside of the U.S. IDC estimates that the Americas, Europe, Middle East and Africa (EMEA), and the Asia Pacific region (APAC) will represent 61%, 22%, and 17% of total global spend on ecommerce platform technology in 2020, respectively, with EMEA and APAC growing at CAGR’s of 8% and 17% through 2024, respectively.
In the Alibaba PDF, we covered the importance of the B2B ecommerce trend (as opposed to the B2C trend). Last year, 10% of BigCommerce’s customers came from B2B sales. In addition, Forrester rated BigCommerce as a “strong performer” for B2B Commerce Suites in Q2 2020. The management has noted this is an area of focus for them. This is an important area to watch as Shopify and other B2C competitors are not listed here.
Facebook Shops launched in May of 2020 as a headless commerce option where various backend services are presented to social media users. For instance, a consumer may be finishing a purchase with Shopify, BigCommerce, Woocommerce, or a few others and the product description will look the same. This eliminates the need for a website in order to sell products. BigCommerce already had previous Facebook integrations. Facebook’s long game is to integrate the cyptocurrency Libra.
Note on Valuation:
BigCommerce has increased its shares from 6.85 million to 9.02 million. The estimated price range is $21 to $23 as of 12 pm ET on August 4th. This puts the market value at $1.7 billion, fully diluted. If we take the ARR the company has represented at $151 million, then the price to sales is 11.2. At the actual ARR of $144 million, the price-to-sales is 11.8. As pointed out by Nasdaq.com, BigCommerce calculates ARR differently than Shopify.
There are very few SaaS companies trading at a forward 11-12 price-to-sales. Shopify is trading at a forward PS ratio of 48. This is why you should expect the opening price to be much higher for retail investors.
Pictured above: Fast-growing SaaS companies can attract a forward price-to-sales around 30 with forward growth of 40%. BigCommerce has forward growth of 32%.
I think it’s important to point out that most IPOs settle below or at their opening price within the first year (assuming BigCommerce opens at a 30-40 price-to-sales).
When Zoom Video went public, they had an immaculate S-1 filing with sizable growth and had a clear and straight path to profitability. We saw this company come down and trade at its opening IPO price within the first year. Pinterest traded below its IPO price many times. Slack has not fully recovered its opening IPO price. Roku began to shoot up very nicely with earnings beats and so this was an exception where the company’s IPO opening was a good deal and buying in the first quarter of its trading history created gains.
BigCommerce has chosen this time to go public for a reason as ecommerce has serious momentum. It’s impossible to predict where the stock will open for retail investors.
BigCommerce will hope to ride Shopify’s coattails. It’s important to consider that we’ve been given a glimpse of how covid has re-accelerated revenue and BigCommerce is posting 32% growth compared to Shopify’s most recent quarter of 97% growth.
The listing’s price-to-sales is very reasonable of 11-12 but once we are in the 30-40 price-to-sales for the opening price, we are confronted with risks as BigCommerce will need to maintain the growth of other popular SaaS products that had competitive growth pre-covid. The question truly becomes “what company do I want at the 30-40 price-to-sales and what companies are worth the risk at the 50 more more price-to-sales?”
IPO frenzies can cause investors to forego rational thinking. I can’t imagine paying a Shopify valuation for a company with 1/3 the growth and 1/20 the revenue. However, there’s a possibility we see it near this valuation tomorrow due to ecommerce being a hot trend. If Bigcommerce shoots up to this level, I will be respectfully on the sidelines. Not because I’m not willing to pay high valuations but because I require above average growth for high valuations.
Conclusion:
BigCommerce is centered in a massive trend yet is not showing as much revenue growth as its competitor, Shopify. Although BigCommerce will certainly open higher than the list price which is at a 12 price-to-sales; how high and if the company is a good value becomes questionable at around the 30 price-to-sales range and even more questionable at the 40 price-to-sales range as the excitement of the IPO would place BigCommerce up against companies that have reported excellent growth for quite a while (rather than one quarter).
We could see BigCommerce accelerate revenue beyond the 32% mark that is being reported after the first full quarter of covid. That’s the gamble – is this quarter and perhaps next quarter an outlier or are they indicative of a more permanent trend and revenue growth trajectory. This is a bigger gamble than Shopify, Zoom Video, and others that had strong growth prior to covid.
The narrowing losses are a major plus. Also, Tiger Global is looking to invest up to 20% because the likelihood of BigCommerce being an acquisition target is high (in my opinion, this is one reason why Tiger Global would take a large stake). It’s easy to think of a few companies that would acquire a $2-$3 billion competitor to Shopify: Amazon, Wal-mart, Facebook, for example. BigCommerce has 60,000 online stores in 120 countries and the fulfillment centers that Amazon and Wal-mart have would be a good match for BigCommerce’s features. Customers include Avery Dennison, Ben & Jerry’s, Burrow, SC Johnson, SkullCandy, Sony, and Woolrich.
We will try to enter up to 30 price-to-sales but may need to back off beyond this and feel that 40 price-to-sales is the cutoff for our portfolio. If the stock trades between 30 to 40, it’ll be up to Knox’s discretion and he will post this in the Buys chat room on the forum.
Ecommerce is hot right now and the market has shown some irrational behavior in other hot trends. We are okay trying to capitalize on hot trends but we prefer to have more consistent growth than one outlier quarter as part of our thesis. We also think the growth should be higher than 32% given the effects of the pandemic. In this case, it’s not worth the 48 price-to-sales ratio that Shopify is trading at but we will see what the (sometimes irrational) market decides tomorrow.
Alibaba’s application to list on the Hong Kong Stock Exchange has been approved and will be an offering of up to $15 billion worth of shares, which will be the 3rd largest listing on the exchange. Alibaba will begin a roadshow soon. The new shares will then go live November 25th.
This listing will allow Chinese investors to buy shares of Alibaba, a beloved company, for the first time. This coupled with China’s recent propensity to buy new tech listings, should be a positive for the stock.
Keep in mind, Hong Kong is going through a period of political unrest. We can see from BABA’s trading action that investors are unsure of how the IPO will affect the stock price in the United States. One scenario is there is an arbitrage situation, where the higher price on the Hong Kong exchange increases the attractiveness for our market.
The above chart is the daily price action of BABA going back to its IPO in 2015. Since bottoming in in late 2015, Baba has been in a strong uptrend, which is highlighted by the blue dashed line moving up. When looking at the health of an uptrend, the RSI can tell you if it’s healthy, or fading. The green arrows indicate a healthy uptrend.
Notice the RSI oscillated above the 70 line and rebounds at the 50 line. This coupled with upward price, suggests more gains are potentially ahead.
Now, notice the RSI in late 2017. The red arrow is indicating that the RSI begins to trend down while the price keeps going up. This is the indication of an unhealthy uptrend.
Since bottoming in December 2018, Baba has recovered to an extent. Notice how the price is being squeezed by the triangle pattern, which is highlighted by the 2 blue dashed lines.
The RSI, though making higher lows, which is a great sign for building momentum, still has not breached the 70 line, which is a warning to bulls. I will want to see the RSI break through this level while price breaks through the upward triangle channel before I can confidently go in for the next leg up, while also raising my stops to protect any gains. Adversely, if the RSI breaks the upward trend, which is highlighted by the green arrow going up just below the RSI, that will be an indication the trend is breaking to the downside.
The Bull Case varies based on the state of the larger degree Wave 2 in green. It basically has us ending the Wave 2 drawdown in December 2018. That would put us already within the Wave 3 uptrend, which I have us topping out around $250 region, simply based on where we generally see 3rd Waves topping out.
The only problem that I have with this count is that the it took around 3 years for the first wave to form, and only 3 months for the second wave. This isn’t normal, but I’ve seen stranger things when analyzing the structure of a trend. So, if Baba decides to break resistance with the RSI in tow, I will happily go long with a stop just under $160.
For a buy and hold, Baba below $160 is a good target for any long only investor. Some of the Fibonacci counts have us with a retrace to at least $130.
Volume Report
The above chart is a snap shot of the daily price action of Baba going back to the beginning of the most recent bear market in China, coupled with the daily volume below the price.
Fundamentally, price is simply a battle between buyers and seller. If you think of it as a scale, if the weight of buyers increases, the price will increase, and vice versa. So, when institutions – i.e., the “smart money” – make a position, it will do so in large volume, which will move the price of the stock.
I look for two things: (1) larger than normal volume spikes, that do not coincide with earnings reports; (2) Large spikes in volume that coincide with large moves in price.
That being said, the blue lines above indicate prices at which we see institutions deciding to sell. The above chart shows four instances of heavy selling with significant price moves within this range.
Notice how difficult it has been for Baba to break out of this range to the upside and hold. I’d like to see the volume spikes shift to the green around this price level before getting more confident in the upward direction of Baba.
Conclusion:
We are long on Alibaba, and believe it is undervalued based on current prices. Our cost basis is currently below $160, so we are holding it without stops. If it breaks the $160 price zone, we will likely add more to our position for the long haul.
If you are more cautious and do not yet have a position in Baba, I’d place a stop just under $157 to protect from a larger degree drawdown. And, if you’d like to wait for more confirmation, you can wait for Baba to confirm both in RSI and in price through the triangle pattern with a much tighter stop.
Alibaba is situated between two of the major growth drivers in tech: cloud infrastructure and B2B eCommerce. China is the world’s leader in manufacturing, and this country has the widest gap between the current cloud IaaS and future cloud IaaS market.
Alibaba would be a breakaway stock if not for the trade war and China’s slowing economy. The second-largest economy in the world grew 6.2% in the second quarter of 2019, a drop from 6.4% in the first quarter. This is the slowest growth since 1992. Industrial output growth slowed to 4.8% in July, which is the weakest pace since February 2002.
This analysis will outline the major industry verticals that Alibaba is uniquely positioned to benefit from along with technical analysis to help guide entry in a choppy geo-political environment.
SECTION 1: Fundamentals
Alibaba trades at 25x forward earnings and 21x cash flow, while growing revenue at 40% with long-term earnings growth projected at 26% and a PEG of 1.1. Amazon trades at a forward PE of 45 and MercadoLibre at 111.
Alibaba’s projected earnings growth is higher than its mega-cap peers at 26%, including Facebook at 21.6%, Apple at 4.53%, Amazon at 18.9%, Microsoft at 11.1%, or Alphabet at 17.6%, placing its implied share price at a minimum of $231 when comparing P/S ratios to forward growth. Based on P/E ratios to forward growth, Alibaba is also undervalued relative to its peers.
According to MarketBeat, analysts have a consensus price target of $221.64, representing 33% price target upside. Analysts have had a BABA price target above $200 since early 2018. Since the last earnings report, HSBC, Morgan Stanley, Raymond James, Goldman Sachs, Bank of America and a few others have either set price targets above $200 or boosted their price target.
• Revenue last quarter rose 42% year-over-year to $16.8 billion compared to 51% growth YoY in the last quarter
• Operating income grew 27% year-over-year excluding stock-based compensation from Ant Financial. Adjusted EBITDA increased 35% year-over-year to $5.7 billion
• Net income was $2.79 billion with non-GAAP net income of $4.05 billion, with an increase of 54% yearover-year
• Diluted earnings were $1.17 and non-GAAP of $1.83, or an increase of 56% YoY.
Core commerce revenue was up 44% and “other revenue” was up 134%, consisting of new retail and direct sales businesses. The company reported strong growth in Southeast Asia, with orders growing over 100% for the third consecutive quarter. Cloud computing was up 66%.
The most recent earnings report called attention to the fast-growing Taobao, the world’s biggest eCommerce site, and Tmall, a spinoff of Taobao. These platforms grew 44% and 34%, respectively. Taobao has 730 million active buyers across its marketplaces, representing about 50% of the Chinese population.
The last earnings report also highlighted additional revenue drivers such as the grocery retail chain Freshippo, and the Cainiao Network, which offers cross-border fulfillment and last-mile solutions. As of June 30th, 2019, there were over 150 self-operated Freshippo stores.
Alibaba may hold a separate listing in Hong Kong for as much as $20 billion this year.
SECTION 2: B2B eCommerce
The B2B eCommerce opportunity is tremendous with estimates the market will reach $12.2 trillion in 2019 compared to $2 trillion for the B2C market. Of this, Asia Pacific contributes 80% to the market with North America and Europe’s share being 12% and 3%, respectively. The four largest markets are China, Japan, South Korea and the United States.
According to Gartner, spending on B2B eCommerce platforms is expected to grow at a CAGR of over 15% during 2015-2020. The Asia Pacific B2B eCommerce market will be worth an estimated $9.8 trillion in 2019, up from $4.7 trillion in 2013. Compare this to the North American market, valued at $1.4 trillion in 2019.
According to Accenture, 50% of B2B companies around the world began to implement a digital strategy in the last three years, rather than rely on a salesperson’s personal relationship with the client. B2B eCommerce follows either a direct model that allows companies to sell directly to buyers, or a marketplace model where products are sold alongside competitors. The marketplace model has gained the most traction due to the ability for wholesalers, distributors, and manufacturers to test new geographic markets.
Alibaba claims 30% of the Chinese B2B market and is expanding its operational base into India, Europe and the United States. Due to a vast network of low-cost suppliers, Alibaba is able to dominate the market. Alibaba’s main strategies include adopting an online to offline (O2O) approach and collaborating with local finance and logistics companies in international markets.
China is the largest B2B eCommerce market in the world and is expected to grow from $1.3 trillion in 2013 to an estimated $3.5 trillion in 2019, at a CAGR of 17%. China’s market is bigger than both North America and Europe combined.
In 2018, the top three B2B platforms in terms of revenue were: Alibaba, HC350 and Cogobuy. Together, these three companies make up 57% of the Chinese market. Alibaba is now focused on the Indian market, where the company competes with Amazon.
SECTION 3: Ant Financial
Ant Financial is the Alibaba affiliate that operates the Alipay payment service. Operating income tripled in the most recent earnings report. Alibaba’s share was $237 million, representing 7% of operating income, which was the highest in two years. In the past, Ant Financial has run at a loss or provided zero earnings.
Ant Financial is worth about $150 billion and serves about 1.2 billion users with 300 million users outside of China. The company is considered one of the most valuable private sector FinTech companies in the world. Due to a recent restructuring deal, Ant Financial is eligible for an IPO in the coming years.
SECTION 4: China’s Cloud IaaS Market
China has been more than fashionably late to cloud infrastructure with a total market size of $1.2 billion in 2018 compared to the United States’ $40 billion in 2018, which affords a window of opportunity. The majority of the 20x growth of this segment in China will funnel into Alibaba with the company already owning 90% of the market.
China’s enterprise IT market is five to seven years behind the United States and Western European markets. Once fully mature, China’s need for cloud infrastructure will rival the United States with 3x the population and a bottomless appetite for smart cities, artificial intelligence and machine learning plus manufacturing IoT automation.
The reversal of where China is today with cloud IaaS, and where China will be in five years, could be a bigger story than the B2B marketplace as the growth is closely tied to China’s position as a global leader.
In 2017, China published a roadmap on how it seeks to become a global powerhouse in AI. According to the report entitled “Next Generation Artificial Intelligence Development Plan,” the domestic AI market will be worth a total of $150 billion. Today, China’s AI market is worth $6.2 billion.
Artificial intelligence and machine learning require private cloud and public cloud infrastructure-as-a-service (or a hybrid mix with on-premise servers) as storing data in separate silos weakens AI and ML capabilities, reduces training performance and lowers accuracy. Artificial intelligence and machine learning require speed with most AI solutions split between 40/60 with private/public cloud or 60/40 if you’re a regulated industry. The United States CIA describes moving to the cloud in 2013 the “best decision we’ve ever made” as what used to take 180 days to provision a server improved to 60 days, and now takes minutes.
At roughly fifty percent year-over-year growth, China’s AI market will reach approximately $60 billion by 20232024, which is in line with China’s Development Plan. This is also in line with the global market forecast which puts the AI market at $190 billion by 2025. The overall Chinese AI industry is growing at a rate of 67 percent and the country is now producing more AI patents than the United States. On that note, Alibaba’s cloud growth is currently at 66% year-over-year with $1.13 billion in quarterly revenue.
4B. Alibaba Cloud
Amazon is the perfect example of how profits from a cloud economy can outpace eCommerce income. The parallels between Alibaba and Amazon are easy to see. Both are e-commerce companies that are pioneers in cloud infrastructure as a vast number of servers had to be built to handle traffic spikes and large work-loads on peak days, such as Black Friday and Singles Day.
In the most recent quarter, AWS accounted for 13% of Amazon’s overall revenue and 52% of Amazon’s $3.1 billion operating income and is growing at 37% year-over-year. Microsoft’s cloud IaaS is growing at 64% YoY.
As stated previously, China has been late to adopt IaaS cloud, and this likely contributed to Alibaba’s delay as the first serious investment by the company was made in 2015, six years after the launch in 2009. Since 2015, it has taken Alibaba only three years to reach a $1 billion run rate compared to Amazon’s six years (2006-2012).
In addition, tech developers are responding to Alibaba with over 120,000 people attending its cloud conference compared to the AWS conference, which attracts 50,000 attendees. This is important intel that financial statements don’t reveal.
Alibaba Cloud reported 66% year-over-year growth in Q2 2019, primarily driven by enterprise customers. During the June 2019 quarter, Alibaba Cloud announced the SaaS accelerator plus over 300 new products and features. This is what the current YoY cloud growth trajectory looks like when modeled.
The law of large numbers could slow the trajectory depicted on the chart, although China’s late entry to the cloud IaaS market is likely to do the opposite and accelerate (or at least sustain) the YoY growth in the nearterm.
Today, AWS reports about 40% growth YoY more than a decade after it launched. Microsoft’s Azure reported 300% growth between 2015-2016 and 90-100% growth for the following years.
Globally, Alibaba has quietly become the number four cloud services provider worldwide, behind Amazon, Microsoft and Google when Synergy Research Group placed Alibaba ahead of IBM. Note, Gartner places Alibaba as the number public cloud provider. Across Asia-Pacific, Alibaba is the number two cloud services provider.
Alibaba Cloud was launched in 2009, however, the company did not take the IaaS revenue segment seriously until 2015, when Alibaba made its first investment of $1 billion. As stated in previous analysis, China has been late to adopt IaaS cloud, and this likely contributed to Alibaba’s delay. When adjusting Alibaba Cloud to 2015, we see it took 3 years to reach $1 billion run-rate (2015-2018) while it took Amazon 6 years to reach a $1 billion run-rate on AWS (2006-2012).
4C. Capex for Cloud IaaS
For the most recent quarter, adjusted EBITDA margin for Alibaba Cloud was -5% compared to -10% and -4% in previous quarters. According to the company, infrastructure and capacity investments triggered the quarterly loss.
Alibaba’s quarterly free cash flow in Q2 2019 was $3.8 billion with net cash of $5 billion. Therefore, like Amazon, the e-commerce business is able to carry the capex requirements for the cloud business. With that said, investors should be aware that building modern cloud computing services requires billions every quarter. For historical. comparison, Google spent $5.6 billion in accrued capex in Q3 of 2018 and Microsoft spent $4.3 billion on capex during the same period for “ongoing investment to meet demand for our cloud services,” as pointed out by Amy Hood, Microsoft’s CFO.
Please keep in mind, there will be opportunities for an attractive entry as Alibaba Cloud will not command AWSlevel and Azure-level percentages of revenue until H1 2020/H2 2020 and onward.
However, once AWS and Azure reached $5 billion in revenue, stock prices were around $300 and $70, respectively so entering Alibaba before the Cloud revenue reaches $2-$4 billion in quarterly revenue is important. While IaaS did not account for all of the increase in revenue (obviously) from the $300 and $70 stock price mark for AMZN and MSFT, I want to emphasize that cloud IaaS is Amazon’s top growth driver still today and Microsoft’s fastest growth driver for many years is Cloud IaaS.
The capex costs will affect free cash flow at times, however, this is not a concern long-term as typical cloud profit margins are around 58 percent and typical operating margins are at 22 to 32 percent.
Time Machine: Time Machine:
I wanted to leave you with a fun, little blurb from Amazon’s earnings in 2011 on AWS when it was at $1 billion in revenue (it’s now at $25 billion in annual revenue in 2018). Alibaba Cloud is at the $1 billion barrier right now.
“The speculation that Amazon's cloud is breaking the $1 billion barrier in the very near future comes as the cloud giant prepares to announce its 2011 second quarter earnings Tuesday.
"While still very small for Amazon (likely about $750 million revenue run rate), given the size of the market opportunity and Amazon's strong competitive positioning, we believe that this could soon be a $1 billion revenue segment," Citigroup Internet analyst Mark Mahaney said in a note to investors last week.
And Mahaney isn't alone in his lofty Amazon cloud expectations. In fact, his estimate could be seen as conservative. JPMorgan Chase's Dough Anmuth told Reuters that he expects Amazon's AWS to generate a whopping $2.6 in revenue come 2015.”
SECTION 5: TECHNICAL ANALYSIS
By Knox Ridley
5A. Overview – Weekly Chart
Looking at the weekly price action, along with the weekly Relative Strength Index (RSI), provides us a with a view of the overall health of a trend. Providing this history helps to also filter out any short term moves that are based on emotions. The above chart is Alibaba’s (BABA) weekly chart going back to 2016.
Long-Term Trend Lines
The dark blue trend lines highlight the long-term trends in play. The uptrend line started with the 2016 bull market. The price has tested this trendline 4 times on the weekly chart, going back approximately three years. It’s worth noting, the more a stock tests a support/resistance region, the weaker it becomes.
There is also a downtrend line, highlighted in blue that has been pushing the price of BABA down since the June high in 2018. These 2 trend lines are converging into a triangle pattern. The price of BABA is being forced to a decision soon, and we will know rather soon if the bottom is in for BABA, and the uptrend will continue, or if we could get a retest of the December lows.
5B. Moving Averages
The 50-Day Moving Average is in orange. The price of BABA is trading just below the 50-day. This average is acting as resistance, and is sandwiched between the 50-day, above, and the blue long-term trend line below. The pressure is currently down, but what BABA does in the next few days will determine the next move in the trend.
The 200-Day Moving Average is in green. The 200-day is commonly looked at as the final stand for a bull pattern. It’s worth noting that the 200-day is currently just below the $130 region, which coincides with the December 2018 bottom and 39.2% retrace level. Any pull back from here, and the 200-day will be major support to follow.
5C. Intermediate Trend Lines and RSI Warnings
The two dotted lines are lower time frame trendlines. Note how the price trends coincide with the RSI trendlines below. This is always a sign of a healthy trend. When I see a trend like this – both down and up – I follow the RSI to get a clue as to when the trend may be over.
The red X indicates the point where the price and RSI both broke their trends. As usual, this happens in unison, and is a major warning for anyone long the position. Leading up to this trend break, the RSI started making lower highs, warning of a momentum slow down. These valuable tools that Technical Analysis can offer help to manage risk.
Conversely, we have the opposite scenario on the downside. The price and RSI followed a downtrend into the December low 2018, which is shown by the second dotted line. Just after this moment, both the RSI and the price broke their downtrends. The RSI made higher highs as the price made its final low. All of these signs indicate a reverse of trend to the upside.
I’m pointing this out because we have a similar pattern unfolding today. The RSI and the price are hovering just above their respective trendlines. If they both break, I would take that as a warning of further down side to prepare for.
In conclusion, because we are trading at the end of a triangle pattern, BABA is about to give us an indication as to the direction of the next move. Below, I outlined the bear and the bull cases.
5D. Elliot Wave – Bear Count
The bear count has us currently in a larger degree Wave 4, which are the numbers #1-#3 highlighted with the blue count. The extensions of this count are in blue on the far right. These extensions act as guides for moves higher and lower and they are important for determining the likely target of any additional pullback.
If we look one degree lower, you’ll see the red 5 count, which is the internal waves of the blue count.
Remember, the pattern of 5 waves in the primary direction and 3 waves in a corrective direction is occurring on
All levels – larger degree and smaller degree. So, the larger degree Blue count, has its own internal count, which can give us clues as to where the market may be leaning.
So, we have a clear 5 waves up in red, which completes wave 3 in the blue count. The retrace levels of this count, are shown in red on the right. We touched the 38.2% retrace level, which acted as final support for the previous pullback.
I put the 50% retrace level on the chart as well, which is the bottom of the bearish target box in green. I don’t see BABA going lower than this level, even in a worst-case scenario. Furthermore, I believe you have to have a “good enough” price tag for a solid long-term investment in a downtrend. Baba at or below $130 is a steal, even if it goes lower.
A pattern that keeps showing up within this pullback is a classic A,B,C correction, where the C wave extends with 5 waves to at least the 138.2% extension. This can be seen with the first drawdown move with the orange A,B,C count, and with the 5 wave count of the final C wave revealed in teal roman numerals. This pattern is a clue to
the likely path of the larger degree pattern, and I am expecting this pattern to unfold to the downside in my primary count. The extension to this final C wave down is shown in pink.
If we break the $146 support region, I will consider this count in play, and suggest preparing accordingly. I will consider this count to be invalidated if we break the triangle pattern to the upside and close above $185. At this point, we will likely be in the bull count, which is listed in the next section.
5E. Elliot Wave – Bull Count
The Bull Count has the larger degree wave 4 ending at the December low. We have all the waves and the proper structure in place to justify this; also, the time frame works to justify this count as well. If this count is where we are, then we are in the final 5th Wave push, and just about to begin the heart of this move, which I calculate will take us well beyond the all-time highs. This count will be invalidated if we move beyond the $146 support region. If this happens, we will likely revisit the $130 support region and possibly beyond.
Because of the fundamental story in BABA, we have a high conviction on the company, yet naturally, are unsure of the geo-political environment. For now, we favor the bull case absent any news around the trade war, the delisting of Chinese companies, etcetera. At minimum, I’d place a stop just below $146. If you want further confirmation, wait for $185.
