2024-01-10 09:06:44 ET
Summary
- Global-e Online presents a compelling investment opportunity in cross-border e-commerce, driven by strategic alliances, competitive advantages, and innovation.
- Drawing parallels with Uber's TAM expansion, GLBE's innovative business model addresses cross-border challenges, potentially unlocking a larger TAM than estimated.
- Evolving revenue mix, high gross margins, and strong NDR demonstrate GLBE's solid fundamentals.
- While optimistic about GLBE's growth, geopolitical uncertainties, potential shifts in NDR dynamics, concerns about the luxury market, and an elevated valuation pose risks.
Editor's note: Seeking Alpha is proud to welcome Henning Podehl as a new contributor. It's easy to become a Seeking Alpha contributor and earn money for your best investment ideas. Active contributors also get free access to SA Premium. Click here to find out more »
Investment Thesis
Global-e Online ( GLBE ) stock presents a compelling investment opportunity in the dynamic realm of cross-border e-commerce. I believe the company's strategic alliances, competitive advantages, and innovative approach position it for a Total Addressable Market ((TAM)) much larger than current estimates suggest. GLBE has witnessed an impressive Gross Merchandise Value ((GMV)) growth trajectory and a notable gross margin expansion from 38.7% in 2022 to 42.3% in the most recent quarter. If the company successfully navigates geopolitical risks and emphasizes Research and Development (R&D) for continual innovation, it stands poised for unprecedented growth, making it an attractive proposition for long-term investors.
A Great Business Model Exhibiting Strong Customer Retention
Global-e has solidified its position as the leader in the cross-border e-commerce market, boasting an impressive clientele including renowned brands like Hugo Boss, Marc Jacobs, Adidas, and LVMH. The company's widespread adoption among such global giants underscores its significance in the industry.
Global-e's business model revolves around providing a comprehensive cross-border e-commerce solution for merchants, facilitating international sales seamlessly. The company offers a platform that addresses the complexities associated with cross-border transactions, including challenges like import duties, foreign sales tax remittances, and diverse payment options.
Over the past four years, the company's revenue mix has evolved, transitioning from predominantly serving mass-market beauty and fashion companies to expanding into the lucrative luxury vertical. This strategic shift, coupled with the inclusion of merchants handling fulfillment independently, has propelled the firm's overall gross margins from 38.7% in 2019 to an impressive 42.3% in the most recent quarter .
In addition, the company showcases robust customer retention rates, emphasizing the loyalty that merchants consistently demonstrate towards its platform.
NDR development from 2019-2022 (SEC filing)
I believe looking at Net Dollar Retention ((NDR)) is crucial when valuing companies with recurring revenue streams. It signifies ongoing customer satisfaction and the company's effectiveness in upselling its services. Despite the challenges posed by the post-Covid e-commerce slowdown, Global-e has demonstrated a consistently strong NDR, attributed to large merchants deploying its solution across various international markets. As evidenced by long-standing partnerships with major brands like Marks & Spencer and LVMH, the company's ability to drive expansion and retain significant GMV speaks to the effectiveness of its platform and the value it provides to clients. Moreover, in its most recent quarter, the company added more customers to its platform , such as high-end consumer electronics brand Bang & Olufsen, Guess Watches as well as Asia Pacific ((APAC)) based brands. As Global-e diversifies its customer base and reduces its exposure to the luxury market, I see this strategic move as advantageous for driving sustainable revenue growth.
Harnessing Data To Dominate Cross-border e-Commerce
The core of Global-e's competitive advantage lies in its multifaceted approach, with data serving as a central moat. Over the years, the company has gathered vast amounts of market insights, consumer behavior patterns across different countries, and pricing strategies. This goes beyond mere feature replication - competitors not only need to match functionalities but also accumulate a comparable volume of data. This data-centric strategy poses a formidable challenge for merchants looking to switch to a competitor offering lower prices but lacking the sophisticated, data-driven insights crucial for success in cross-border sales. Global-e's strategic use of data contributes to a sustainable competitive advantage, which should enhance pricing power and thus increase margins over time.
The issue of switching costs is another critical aspect to consider. While some research suggests relatively low switching costs due to the business's minimal upfront expenses for merchants, this perspective evolves as companies scale through the platform. As enterprises grow, the cost of switching increases , accompanied by a lengthier onboarding process and higher foregone revenue. This represents a substantial switching cost for developed enterprises contemplating a shift to a lower-cost provider or considering in-sourcing strategies.
Lessons Learned From Uber: Global-e's TAM Might Suggest Significant Upside
The conventional approach to estimating a company's Total Addressable Market may fall short when revolutionary changes redefine the market landscape. Drawing parallels to historical misjudgments, such as AT&T's underestimated cell phone penetration , it becomes evident that innovation can dramatically expand the market.
Drawing insights from an article critiquing Aswath Damodaran's miscalculation of Uber's (UBER) Total Addressable Market in 2014, the pitfalls of solely relying only on existing market parameters become evident. Damodaran's oversight, focusing solely on the global taxi and car-service market, neglected Uber's real TAM expansion. However, he admitted to it later, providing clarification that he misinterpreted Uber's TAM.
This serves as a cautionary tale, highlighting that innovative companies addressing industry challenges often result in a TAM larger than initially assumed. Uber's transformative user experience, offering faster pick-up times, increased coverage density, online payment options, and enhanced safety measures, broadened its use cases beyond traditional expectations. This innovation also included providing alternatives for rental cars and supplementing mass transit, further amplifying Uber's TAM.
Uber TAM estimates (SEC filing)
Uber's dynamics in expanding its TAM can also be applied to Global-e and its innovative business model. The easier it becomes for merchants to sell internationally, the more they will engage in cross-border e-commerce. Challenges like import duties, payment methods, and language support are akin to past hurdles in industries like taxi services, which were revolutionized by innovative solutions.
Significantly enhancing an offering by introducing new features, functions, experiences, and price points, and enabling novel use cases has the potential to substantially expand the market. Relying on past performance as a guide for the future can be misleading when the upcoming offering differs significantly from what has occurred in the past.
Global-e business flywheel (SEC filing)
Global-e effectively addresses numerous challenges prevalent in cross-border e-commerce. At present, numerous enterprises hesitate to venture into foreign markets due to the complexities involved . Calculating import duties and handling foreign sales tax remittances poses a significant burden for companies. Import duties are especially difficult to determine as each country has its own import regulations and tariff schedules. Understanding the specific requirements and rates for each country can be challenging due to variations in laws, policies, and procedures. Numerous other factors come into play, including considerations such as trade agreements, documentation requirements, and customs valuation, to name a few. Additionally, companies must provide a variety of payment options, recognizing that some customers prefer alternatives to traditional methods like Visa (V) or Mastercard (MA). Ensuring transparent, competitive, and locally tailored pricing, along with customer support in the preferred language, and a streamlined return and refund process, adds another layer of complexity to successful cross-border e-commerce operations. Global-e's platform successfully solves these issues. As more enterprises recognize the potential of the company's platform and its capabilities of facilitating international sales, I believe the TAM for Global-e could be significantly greater than current estimations.
Valuation
Providing an exact estimate for Global-e's Total Addressable Market proves challenging, given that the market is still in its early stages, largely due to perceived complexities associated with cross-border selling.
In my valuation, I estimated GLBE's TAM and derived a valuation for the stock. Recent research from the Boston Consulting Group (BCG) suggests that by 2027, e-commerce penetration will reach 41% . Assuming total retail sales of approximately $34.9 trillion in 2027 and a 41% e-commerce market penetration, the e-commerce market opportunity is estimated at $14,023,032 million. Assuming a cross-border mix of approximately 10%, a conservative estimate considering factors that could drive cross-border revenue in the future, if Global-e captures only about 1.5% of that market and maintains an 8% take rate, the projected revenue for FY2027 would be around $1.683 billion. I further assume that the company trades at a conservative 7x multiple by 2027, considering significant room for improvement in profitability, and accounting for an 8% annual increase in shares outstanding, the estimated share price could reach around $54.00. Consequently, I believe there is substantial upside potential for GLBE, amplified by the uncertainties surrounding its TAM and the evolving landscape of cross-border services.
TAM and share price estimates (author's calculation)
Risks To The Thesis
While I'm optimistic about Global-e's growth potential, it's essential to address potential risks that could challenge this bullish thesis. Geopolitical uncertainties, including escalating global conflicts and heightened political tensions, pose noteworthy risks. The increasing likelihood of isolationist policies and trade embargoes among nations could impact Global-e, given its heavy reliance on the ongoing interdependence of countries. Additionally, the company's commitment to Research and Development (R&D) is crucial for refining processes and enhancing the cross-border market's attractiveness. Any significant reduction in R&D spending, especially in a deteriorating macroeconomic environment, could hinder overall TAM development and warrant a reevaluation of the bullish stance. The strong Net Dollar Retention is currently driven by enterprise customers ramping up D2C operations, but any shift in this dynamic could pose a risk. In addition, heightened concerns surrounding a potential slowdown in the luxury market, exacerbated by ongoing economic and governmental challenges in China, warrant careful consideration. Given Global-e's significant exposure to companies in the luxury segment, any adverse developments in this sector could impact the company's performance.
Valuation ratios (Seeking Alpha)
The most substantial concern is the company's valuation, currently at 11.26x Sales and 25.6x next year's gross profit, plenty of growth, and margin expansion are already factored into the stock price.
Wrapping Up - TAM Dynamics And Strategic Leadership In Global-e's Narrative
In summary, Global-e stands as a compelling investment choice in the ever-evolving cross-border e-commerce space. By drawing parallels with historical misjudgments and learning from Uber's TAM expansion, In my view, the company's potential appears larger than current estimations. The company's strong NDR and solid fundamentals are crucial for sustainable revenue growth. However, strong management execution seems already been factored into the stock price, as GLBE is valued richly at current levels. While I also view geopolitical tensions and R&D expenditure potential risks, Global-e's strategic position, diverse clientele, and innovative approach position it as a robust player in the dynamic market.
For further details see:
Global-e Online: TAM Expansion Could Drive Strong Upside