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.