SHOP - BigCommerce: Major Catalyst Ahead

2023-06-15 10:53:59 ET

Summary

• BigCommerce is a fast-growing company offering an e-Commerce SaaS platform to online merchants.
• The e-Commerce company is seeing strong growth in annual recurring revenues, especially in the Enterprise segment.
• BigCommerce is projected to reach profitability in FY 2024 and shares are undervalued relative to its key rival, Shopify.

Shares of BigCommerce (BIGC) have declined 87% in value in the last 3 years as investors ditched high-priced growth stocks after the pandemic. However, e-Commerce remains a growth industry and BigCommerce has a lot of potential to take a larger pie of the market going forward. BigCommerce continues to see double-digit top line growth and has a strong market position in the Enterprise segment. Additionally, BigCommerce is expected to achieve profitability next year which could be a catalyst for an upside revaluation!

A key player in the e-Commerce industry

According to eMarketer projections , the global e-Commerce market is set to grow 8.9% in 2023 to a market size of $5.9T. While growth has leveled off after the pandemic, the market is still projected to grow at healthy rates of 8-9% annually over the next four years.

Big Commerce has a lot of potential to tap into this growing e-Commerce market by scaling its Enterprise store plans. Like Shopify ( SHOP ), BigCommerce offers subscription plans for merchants to sell their products and services through online stores. BigCommerce has an especially strong market position in the Enterprise market whereas Shopify owns the majority of the retail market.

BigCommerce has seen strong growth in the Enterprise market since its IPO in 2020 and Enterprise clients now account for 72% of annual recurring revenues.

The Enterprise market has been at the center of BigCommerce's growth strategy and the company has had decent success in attracting more clients to its SaaS platform over time, but especially during the pandemic.

As is the case with Shopify, the end of the pandemic has led to a deceleration of BigCommerce revenue growth, but both firms are still growing their revenues at double digits annually. In the most recent quarter, BigCommerce posted 21% year-over-year growth in Enterprise annual recurring revenues and I estimate that the company could achieve a revenue base (in the Enterprise market) of $400-420M by the end of FY 2025.

The biggest revenue source for BigCommerce is subscriptions which accounted for 74% of the firm's revenues in FY 2022 and 75% in Q1'23. Subscriptions allow online retailers to use BigCommerce's SaaS e-Commerce platform and sell their products and services to customers. The second revenue stream relates to "Partner and Services" which include revenues generated from the sale of technology integrations and store customizations. BigCommerce likely has the biggest potential in subscriptions as this is already the fastest growing business segment for the company.

Organic revenue growth and improving customer monetization

BigCommerce benefits from merchants spending more money over time on the firm's products and service offerings. A breakdown of cohorts shows that merchant groups tend to increase their spending on BigCommerce's SaaS e-Commerce platform over time as their businesses grow.

BigCommerce's valuation vs. Shopify

BigCommerce is expected to achieve revenue growth of 10% in FY 2023 and 14% in FY 2024 while Shopify is projected to reach 20% and 18% top line growth rates. However, Shopify's top line potential is much more expensive than BigCommerce's: Shopify has a price-to-revenue ratio of 10.6X compared to a P/S ratio of 2.02X for BigCommerce. Since both companies operate in the same market and Shopify is a much bigger company with a market cap of $84.3B and a revenue base 21X larger than BigCommerce's, I could even see Shopify acquiring its smaller e-Commerce rival at some point in the future.

Path towards profitability

BigCommerce is not profitable, but consensus estimates imply that the SaaS e-Commerce platform is moving towards profitability rapidly. For next year, FY 2024, analysts project BigCommerce to report $0.07 per-share in profits while the consensus expectation is that the e-Commerce firm will rack up another loss this year. BigCommerce's EPS trend has also improved in recent months and the company has guided for positive adjusted EBITDA in Q4'23.

In my opinion, it would be a milestone achievement if the company started to post profits and it could be a catalyst for BigCommerce's shares to move into a new up-leg.

Risks with BigCommerce

The big risk that I see with BigCommerce is that the company could see a slowdown in its annual recurring revenue growth going forward, but that doesn't mean that growth will stop entirely. BigCommerce not being able to achieve profitability next year would also be a negative development for the company and its shares.

Final thoughts

BigCommerce has a strong position in the Enterprise segment of the e-Commerce market and has shown an ability to grow its annual recurring revenues from this segment consistently since its IPO in 2020... although growth has started to level off after the pandemic. While BigCommerce is currently not profitable, the firm is on a good path towards profitability and could reach positive earnings as soon as FY 2024. Shares of BigCommerce are very attractively valued, relative to Shopify, and I believe there is even the possibility of a potential acquisition by Shopify in the future!

For further details see: