SHOP - Global-e Online: Risky Business Getting Riskier

2023-11-18 06:34:00 ET

Summary

• Global-e's stock has experienced significant volatility, dropping 40% and gaining 150% since September 2022.
• The stock dropped nearly 30% on November 15 due to an overreaction to Q3 2023 earnings despite the company's continued growth.
• The ongoing war in Israel, where half of Global-e's workforce is located, poses a significant risk to the company's operations.

I last covered Global-e Online Ltd. (GLBE) in September of last year. I outlined the business, the services it provides, and a huge TAM in cross-border ecommerce of which Global-e helps to facilitate.

Indeed, I like Global-e a lot as a high conviction growth stock. However, I also warned of Global-e's volatility, and encouraged investors to position size accordingly.

Since my initial BUY rating in September 2022, the stock dropped 40%, gained 150%, and peaked at a 50% gain from my original recommendation. As of today, Global-e has given up all those gains and is flat to my BUY recommendation at $30 per share. That's a heck of a ride in 1 year.

In this article, I'll discuss why Global-e dropped nearly 30% on November 15, and why I recommend position-sizing even smaller than I did a year ago.

Q3 2023 Overreaction

Global-e reported Q3 2023 earnings on November 15 resulting in the stock dropping 27% that day. In my opinion, it was a gross overreaction. There were 2 primary drivers which caused short-minded investors to panic, neither of which is the reason I'm most concerned about Global-e which I'll highlight later.

First, investors were upset Global-e cut its full-year 2023 revenue guidance from $570-$596 million to $563-$571 million. From the mid-point of each, that's a 3.5% downward revision representing $8 million in revenue.

Mind you, in Q3 2023 Global-e's gross merchandise value (GMV) was up 35% YoY while revenue was up 27%. And the 2023 full-year guidance implies Q4 revenue of $182 million, which represents 30% growth over Q4 2022.

No matter how you slice it, Global-e is still growing like a weed.

Second, Global-e missed its Q3 2023 revenue guidance by 5% or $7.36 million. CEO Amir Schlachet attributed the revenue miss to this:

The main impact came in the form of softening consumer demand in European markets as well as overall weaker demand in the luxury fashion segment.

But continued with this:

...starting late October and over the past few weeks, we have seen positive signs indicating a possible recovery in consumer spending towards the peak trading season with same-store sales figures bouncing back. We also have reason to believe that the overall take rate we are seeing in the second half of this year will remain relatively stable into next year.

So while the short fall in GMV in Q3, combined with the prevailing macro-related uncertainty levels around consumer spending have forced us to revise our annual guidance slightly downwards. We nevertheless believe that these early positive indications over the past few weeks, together with the continued strength of our many growth engines and our new bookings will enable our growth rates to accelerate going forward and into 2024.

Short-term thinking within the market caused the stock to drop nearly 30% on November 15. The market totally ignored Global-e's still enviable growth and its increase in 2023 EBITDA guidance reflecting improved profitability.

A Greater Risk

Global-e is headquartered in Israel. As I'm sure most are aware, Israel is at war with the terrorist group Hamas. It's a terrible tragedy. But did you know roughly 50% of Global-e's workforce is stationed in Israel? And that some have been called for active duty?

Here's an excerpt from CEO Amir Schlachet's prepared remarks from the Q3 2023 earnings call:

From a business operations perspective, while some of our Israeli colleagues have been called for active reserve duty, there has been no impact on our ongoing activities, and our business continues to operate as usual. As you know, and as our company name suggests, Global-e is truly a global organization, working natively in diverse teams spread across more than 20 locations around the world with only about half of the workforce located in Israel.

Global-e has stated it expects no impact to business operations as a result of the war. But with half the workforce located in Israel, it's a risk too big to ignore. Even if most of its business is cloud-based.

Not to get too religious, but biblical scholars and Christians (of which I am) may believe Israel's future gets a lot darker before seeing a great Light.

It's for this reason I'm very cautious on Global-e, and why I recommend position-sizing even smaller. It's up to the individual investor to define "small" for themselves.

On The Bright Side

Even in the midst of a war, Global-e continues to drive growth and profitability. During its Q3 2023 earnings call, the company provided updates on a few developments which I believe have a lot of potential.

First, is the successful launch of Shopify Markets Pro for US merchants. In short, Shopify Markets Pro allows merchants to offer products internationally and expand their geographic reach. For an international transaction, Global-e takes a cut of the purchase price because its platform facilitated the transaction.

Shopify (SHOP) operates a huge marketplace. If widespread adoption of Shopify Markets Pro occurs, Global-e will benefit greatly. Early results are encouraging, but it's too early to ride home just yet.

Second, Global-e is piloting its platform with Wix (WIX) merchants. Wix, a competitor of Shopify, offers a platform allowing customers to create and operate their own websites, including ecommerce sites. If the pilot proves successful, this too could lead to wider scale adoption of Global-e on Wix, thereby further increasing its TAM.

Conclusion

It'd be difficult to follow Global-e's story and not get excited. The company is growing quickly and improving profitability. It operates in the cross-border ecommerce market which has a huge and growing TAM, expedited by technology such as Global-e's.

Relatively speaking, Global-e is a small company with a market cap of $5 billion. Considering the opportunity in cross-border ecommerce and Global-e's leading position, I could easily see it 10x over the next 10 years. That's the optimistic, excited part of me.

But as I consider the geopolitical risks associated with being headquartered in Israel, I choose to temper my excitement. Which, for me, means small position sizing and/or reducing exposure in Global-e.

Full disclosure - I chose to close my position entirely after the war broke out. The 30% drop in share price after posting Q3 2023 earnings has me considering re-opening a small stake.

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