- We determined that the company's revenue growth decline in 2018 and 2019 was mainly driven by its decline in active customers during the period from 4 mln to 3.2 mln.
- We believe this is attributable to factors including the tax crackdown on customers, credit card data breaches, and counterfeit goods which may affect future growth.
- However, we still projected the company's revenue growth at a 3-year forward average of 16.5% driven by rising AOV and as the company's NPS score improved.
Newegg Commerce, Inc ( NEGG ) is a US e-commerce company that focuses on electronics. The company operates both B2B and B2C platforms. We analyzed the company as its revenue growth had declined by 24.2% from FY2018 to FY2019 to identify the reasons for this decline and determined if these factors could impact its future revenue growth.
Revenue Recovering From 2019 Low
Newegg | 2017 | 2018 | 2019 | 2020 | 2021 |
Total visits ('mln') | 263.3 | 261.6 | 262.20 | 382.20 | 305.10 |
Growth % | -0.6% | 0.2% | 45.8% | -20.2% | |
Number of active customers ('mln') | 4 | 3.9 | 3.2 | 4.7 | 3.5 |
Growth % | -2.5% | -17.9% | 46.9% | -25.5% | |
Gross Merchandise Value (GMV) ($ bln) | 2.5 | 2.4 | 1.9 | 2.7 | 3 |
Growth % | -4.0% | -20.8% | 42.1% | 11.1% | |
GMV per active customer | 625.00 | 615.38 | 593.75 | 574.47 | 857.14 |
Growth % | -1.5% | -3.5% | -3.2% | 49.2% | |
Average Order Value ($) | 286 | 299 | 310 | 301 | 442 |
Growth % | 4.5% | 3.7% | -2.9% | 46.8% | |
Take Rate | 86.32% | 84.27% | 80.73% | 78.33% | 79.21% |
Growth % | -2.4% | -4.2% | -3.0% | 1.1% | |
Conversion rate | 3.4% | 3.2% | 2.4% | 2.4% | 2.3% |
Revenue ($ mln) | 2,158 | 2,022 | 1,534 | 2,115 | 2,376 |
Growth % | -6.3% | -24.2% | 37.9% | 12.4% |
Source: Newegg , Khaveen Investments
We analyzed the company's customers based on the total visits, number of active customers, average order value and conversion rate to identify the reason for the revenue decline from 2018 to 2019.
Based on the table above, the company's revenue and GMV had positive growth in the past two years (2020 and 2021) which was an improvement compared to its negative growth in 2018 and 2019. GMV is calculated from the total number of active customers & GMV per active customer. Moreover, the company's total visits grew in the past 5 years which is in contrast to its active customers which declined, indicating that the company is not able to capture visits and convert them to sales. This is also witnessed by its decreasing conversion rate from 3.4% in 2017 to 2.3% in 2021. Furthermore, in 2021, we believe that the revenue growth was mainly driven by the increase in AOV (46.8%) which drove the growth in GMV per active customer at 49.2%.
Thus, based on our analysis, all metrics showed an increase from 2018 to 2019 except for the number of active customers and GMV. Hence, we believe that the reason for its revenue decline is due to the decline in its active customers resulting in its GMV decreasing.
Long-term Revenue Growth Supported by AOV Growth
Based on our point above, we determined the company revenue growth in 2018 and 2019 was affected driven by the decline in active customers. We examined the potential factors to explain the decline in active customers.
Below are the events we believe that had contributed to the decline in active customers in 2018 and 2019:
- Tax Bills: In March 2018, Newegg customers in Connecticut were affected by the tax crackdown . Newegg had shared the past purchase records of its customers with the Department of Revenue Services ('DRS') which went after customers on the sales tax issue.
- Credit Card Hacking: In September 2018, for one month period, Newegg had a data breach involving customers' credit card info. Some customers' info may have been stolen and Newegg responded to the issue by sending emails to its customers.
- Counterfeited Goods: In April 2019, a study by the Government Accountability Office found that 40% of commonly counterfeited products were fake on websites including Amazon ( AMZN ), Sears, Walmart ( WMT ), eBay ( EBAY ) and Newegg
We believe that all these events cumulatively affected consumer trust and affect the growth of Newegg's active customers in 2018 and 2019. However, we believe that the tax issue would not continue to affect the company's revenue growth as it was only in one state and is a one-off event. That said, we believe there could still be counterfeit goods reportedly sold on Newegg hence this may affect the company's future revenue and we could not find any measures Newegg had implemented to prevent future security breaches. Hence, we believe that these two events may happen again in the future and affect Newegg's revenue growth.
Main Factor Affecting Revenue Growth:
Newegg | 2018 | 2019 | 2020 | 2021 |
Factors | GMV | GMV | Number of active customers | Average Order Value |
Growth % | -4.0% | -20.8% | 46.9% | 46.8% |
Source: Newegg, Khaveen Investments
As shown in the table, we believe the main driver of its revenue growth was AOV growth in 2021. According to Comparably, Newegg's current NPS is negative at -26. However, the company's NPS score had improved in the past 1 year from -51 in July 2021. We believe this indicates improving customer satisfaction on its platform which could spur higher spending on its platform and drive its AOV growth higher and support its revenue growth going forward.
Revenue Projection At a 3-year Forward Average of 16.5%
Newegg Revenue Projection ($ mln) | 2017 | 2018 | 2019 | 2020 | 2021 | 2022F | 2023F | 2024F |
Number of active customers ('mln') ('a') | 4 | 3.9 | 3.2 | 4.7 | 3.5 | 3.7 | 3.8 | 4.0 |
Growth % | -2.5% | -17.9% | 46.9% | -25.5% | 4.3% | 4.1% | 3.9% | |
GMV per active customer ('b') | 625.00 | 615.38 | 593.75 | 574.47 | 857.14 | 968.4 | 1,094 | 1,236 |
Growth % | -1.5% | -3.5% | -3.2% | 49.2% | 13.0% | 13.0% | 13.0% | |
GMV ($ bln) ('c') | 2.5 | 2.4 | 1.9 | 2.7 | 3 | 3.53 | 4.16 | 4.88 |
Growth % | -4.0% | -20.8% | 42.1% | 11.1% | 17.8% | 17.6% | 17.4% | |
Take Rate ('d') | 86.32% | 84.27% | 80.73% | 78.33% | 79.21% | 78.47% | 77.74% | 77.02% |
Growth % | -2.4% | -4.2% | -3.0% | 1.1% | -0.9% | -0.9% | -0.9% | |
Revenue ('e') | 2,158 | 2,022 | 1,534 | 2,115 | 2,376 | 2,774 | 3,232 | 3,761 |
Growth % | -6.3% | -24.2% | 37.9% | 12.4% | 16.7% | 16.5% | 16.3% |
*c = a x b
e = c x d
Source: Newegg , Khaveen Investments
Based on the point above, we expect the factors affecting its revenue growth in 2018 and 2019 not to continue to impact future revenue growth significantly. We projected the company's GMV based on its 2-year average increase in the number of active customers of 0.15mln per year and average GMV per active customer growth of 13% driven by increasing AOV. We then projected the company's take rate to decline by its 2-year average rate of -0.9%. Lastly, we calculated the projected revenue with the projected take rate and projected GMV. As shown in the table, we projected the revenue to grow at 16.7% in 2022 but tapering down by 0.2% yearly.
Risk: Security Breach and Counterfeit Goods
We did not find any info regarding Newegg's recent measures in solving the past security breach and counterfeit goods issues. Hence, we believe there is a risk that these events may occur again in the future and affect the company's number of active customers and revenue growth.
Verdict
P/S Valuation | P/S ('TTM') | Revenue ($ mln) | Price Target ($) | Upside |
Current | 0.64x | 2,376.20 (2021) | 4.11 | 7.1% |
Current | 0.64x | 2,773.70 (2022F) | 4.80 | 25.0% |
Industry | 0.90x | 2,376.20 (2021) | 5.78 | 50.6% |
Industry | 0.90x | 2,773.70 (2022F) | 6.75 | 75.8% |
Source: Seeking Alpha , Khaveen Investments
We conclude that the decline in 2018 and 2019 was due to a decrease in active customers with several attributable factors including the tax crackdown, customer credit card hacking, and counterfeit goods. Moreover, we projected the company's revenue to grow at 16.7% in 2022 driven by GMV per active customer growth as we see its AOV continuing to increase. Finally, we valued the company based on the current industry P/S valuation of 0.9x and our 2021 and 2022 forecasted revenue, arriving at a target price of $5.78 (2021) and $6.75 (2022F) respectively. In comparison, with the current company P/S of 0.64x, we arrived at a price target of $4.11 (2021) and $4.80 (2022F). We believe that using current P/S would be more reasonable given the events that affected the company in 2018 and 2019, thus we based our valuation on the price target of $4.80.
For further details see:
Newegg: Revenue Growth Supported By GMV Growth