Global-E Online: Buy This High-Flying E-Commerce Company (NASDAQ:GLBE)

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Why Buy Global-e Online at Current Prices

Global-e Online (NASDAQ: GLBE) is a first mover in a rather large niche within e-commerce that is growing like wildfire and the company has no real substantial competitors. Global-e Online facilitates D2C or the direct-to-consumer cross-border e-commerce, which is an immense market that is directly fueled by Millennial spend and is growing significantly faster than the overall e-commerce market. Global-e Online is riding that market and is also exhibiting rapid growth, despite COVID-19 recovery headwinds. Secondarily, while the company was unprofitable on a GAAP basis in Q3, it is expected to show rising bottom-line profitability moving forward. Global-e has also shown significant gross margin expansion lately, which the company attributes to growing economies of scale and increased efficiencies.

Another thing to consider is that Global-e Online recently had its lock-up period expire in early November, which might at least partially account for the valuation drop off in September, as investors anticipated the lock-up period expiring. So, the worries about what will happen when the lock-up period ends have been taken out of the stock evaluation.

Last but not least, while the company might be considered expensive on both an absolute basis and on a relative basis compared to other e-commerce companies, when considering that the company has a greenfield opportunity with very high potential upside and little competition, I believe the company is currently selling at a “Buy Now” valuation for aggressive investors with a time horizon of three to five years.

Metrics That Support the Bull View

Let’s look at a few of the metrics that support the company’s current valuation.

Global-e Online’s Q3 2021 Gross Merchandise Value (GMV) grew 86% year-on-year to $352 million. I like looking at GMV for online marketplaces because generally this metric determines the overall health of the business. What we want to see here is a rapidly expanding GMV as the faster the GMV growth is, the healthier the growth.

Currently, Global-e is encountering strong headwinds due to the fact that COVID-19 vaccines and treatments such as Pfizer’s (NYSE: PFE) new pill are becoming widely available, which is slowly helping to wind down the worst of the pandemic. What this means for Global-e is that they are now encountering the reopening of physical retail, which is now competing more strongly for the consumer spend that was forced online in 2020. The record levels of e-commerce market share that occurred in 2020 have declined throughout 2021, which has resulted in growth headwinds for Global-e and those headwinds can be seen in a deceleration from triple-digit revenue growth earlier in the year to 77.40% year-over-year revenue growth in Q3 2021.

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Data by YCharts

However, the good news is that gross profit grew even faster than revenue growth. Global-e gross profit grew 127 % year-on-year, resulting in a rapidly expanding gross margin. Global-e’s gross margins expanded in Q3 to 38.6%, up from 30.2% in Q3 of last year.

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Data by YCharts

Goldman Sachs (NYSE: GS) analyst Will Nance has taken notice of the rapid gross profit growth and initiated the stock with a buy with the following commentary:

The company’s profitability is a result of its “differentiated product offerings levered to the growth in cross-border e-commerce, in addition to its partnership with SHOP, which we believe can add as much as 42% to gross profit by 2023.”

Source: Seeking Alpha

The improving profitability numbers have also dropped down to the bottom line with Adjusted EBITDA almost tripling year-over-year to $7.7 million. The company attributed these results to the company’s “highly efficient operating model”.

Operating cash flow in Q3 was $5.5 million compared to negative operating cash flow of $0.5 million a year ago, due to the increase in adjusted EBITDA. Free cash flow (“FCF”) in Q3 was $5.1 million and Global-e produced $24.0 million in FCF on a TTM basis.

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Data by YCharts

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Data by YCharts

Balance sheet had $492.50 million in cash, cash equivalents, and short-term investments at the end of Q3 quarter. There was no long-term debt on the balance sheet and the company had payables of $54.10 million at the end of Q3.

Global-e Online has already used some of its great balance sheet to invest in growth, when in late November company they acquired Flow Commerce for an aggregate purchase price of up to $500M (in equal portions of cash and Global-e shares). The purchase price comprises a base consideration of ~$425M and up to ~$75M in potential additional consideration based on financial results in 2021, plus ~$45M in Global-e shares for certain assumed, performance-based vesting warrants for Flow shares. I will discuss the reasons for this acquisition later in this article.

Guidance

Guidance

Source: Global-e Online Q3 2021 Press Release

GMV in Q4 is expected to be in the range of $465 million to $475 million. At the midpoint of this range, this represents a growth rate of 55% versus Q4 of 2020. Global-e Q4 revenue is expected to be in the range of $76.4 million to $78.4 million. This represents a growth rate of 45% at the midpoint of the range versus Q4 of 2020.

Adjusted EBITDA is expected to have a profit in the range of $7.3 million to $8.3 million. For the full year of 2021, the company is raising guidance and anticipating the GMV to be in the range of $1.41 billion to $1.42 billion, representing nearly 83% annual growth at the midpoint of the range. Full-year revenue is expected to be in the range of $239 million to $241 million, representing a growth rate of 76% at the midpoint of the range. Adjusted EBITDA is expected to show a profit of $27.9 million to $28.9 million.

Analysts also have expectations that Global-e will show profitability moving forward on the bottom line. This is very important because if the Federal Reserve moves forward next year with interest rate hikes, the stocks that the market is going to punish first and the most are unprofitable companies with negative cash flows. Global-e might be spared from significant sell-offs due to it being predicted to show profitability and positive cash flows throughout next year. The company is also already showing the ability to increase margins throughout 2021, which is generally acknowledged as a difficult period for many growth stocks.

Global-e Online EPS Estimates

Source: Seeking Alpha

Global-e Online & Shopify

The Global-e Online exclusive strategic partnership with Shopify (NYSE: SHOP) was formed this past April and was a major catalyst behind the stock of Global-e Online going on a tear after the company had its IPO in May. Currently, Global-e’s stock is up 141.84% YTD, even though the Shopify partnership has yet to contribute any meaningful revenue. Investors are currently speculating that Shopify will be a major contributor to the company’s future revenues and quite frankly that sentiment is not much of a stretch because Shopify is well on its way to becoming one of the most dominant e-commerce platforms in the English-speaking world.

If everything is going according to plan, the Global-e and Shopify partnership should be close to finishing or has already completed a deep integration of Global-e’s platform into the Shopify platform and checkout. By the end of the third quarter, CEO Amir Schlachet indicated that Global-e Online was already achieving the expected market traction with the Shopify merchant base. A few named Shopify merchants that have already started using the Global-e platform are Netflix and Alo Yoga. Investors, however, need to be patient with the ramp of the Shopify integration because Global-e also receives significant business from Salesforce Commerce Cloud (“SFCC”) (NASDAQ: CRM), BigCommerce (NASDAQ: BIGC) and a few others, which means that the Shopify revenue mix should happen gradually and eventually become a significant portion of Global-e’s revenues over the next two to three years.

Last but not least, Shopify has put their money where their mouth is, by purchasing a significant Global-e Online ownership stake pre-IPO that became 5.4% of Global-e’s outstanding stock post-IPO. Shopify also acquired 11.85 million warrants that will enable them to purchase more shares in Global-e over the next two years, which would allow Shopify to more than double its ownership stake. So, when all is said and done, Shopify could wind up owning over 10% of Shopify. This shows that Shopify has significant confidence in the future of Global-e Online.

Global-e Online is ready for M&A

Global-e is actively looking for bolt-on companies to acquire to help the company build out more capabilities and also acquire more customers. Recently, Global-e accomplished that M&A goal by acquiring one of their competitors in November. One weakness that Global-e knew they needed to patch was the fact that there was a group of small merchants that were not eligible to use Global-e’s services and the company wanted to expand into that addressable market of small emerging brands. When Global-e acquired Flow Commerce’s API-based technology, it gave Global-e the capability to provide services to small merchants that were previously not eligible. The fact that Flow Commerce’s technology is API-based essentially means that Global-e should be able to rapidly integrate the Flow Commerce technology onto its existing platform.

In my last article on Global-e Online, I mentioned that recently Shopify had created a service called Shopify Markets that has similar cross-border ecommerce features as the Global-e’s platform and many investors had wondered if Shopify has chosen to also try to compete significantly with Global-e. At the time, Global-e Co-Founder and CMO Nir Debbi, responded to a question in the earnings call about whether Shopify Markets directly competes with Global-e, even though the two companies have a partnership, by saying that both companies view the two solutions as somewhat similar but complementary solutions and explained further that Shopify Markets is designed more for smaller SMB clients while the vast majority of the potential GMV in cross-border trading is concentrated at the top 1% or 2% of Shopify merchants, which is where Global-e provides a more comprehensive, high-touch and sophisticated solution.

Obviously, Global-e Online did view not addressing smaller customers as a hole in their portfolio and almost immediately patched it with the acquisition of Flow Commerce and now the question might be whether Shopify will continue to build out Shopify Markets or simply cede that market to Global-e by allowing the company to expand the scope of their exclusive relationship to now include smaller merchants, which would be accomplished through the use of the technology acquired in the Flow Commerce transaction.

Competitors

Global-e Online doesn’t really have any major competitors of note. Global-e Online’s biggest competitors are enterprises deciding to build out their own in-house platform. There are some people that view this as a major risk but in reality, few companies want to make the heavy investments that would be necessary to build out a logistics platform. Some companies might build out a domestic platform but outside of few companies like Amazon (NASDAQ: AMZN) and Sea Limited (NYSE: SE), I don’t expect many companies to build out a large logistics platform connecting multiple international locations.

Shopify probably could have become a major competitor to Global-e Online but instead of competing Shopify decided to build an exclusive partnership with Global-e Online. I think Shopify got a little taste on what building out a logistics network was by building out the domestic focused Shopify fulfillment Network in the US market, which is nowhere near being on the level of competing with Amazon and I think Shopify decided to stick with the things it does best and decided to partner with Global-e Online instead of trying to re-invent the wheel by trying to provide a similar service as Global-e.

Global-e does have smaller competitors that many people probably have not heard of before like ON24 (NASDAQ: ONTF), SurveyMonkey (Private), Visualsoft (Private), Borderfree (Private), Zonos (Private), Digital River (Private), GlobalShopex (Private), Glopal (Private), SelluSeller (Private), BorderWise (Private), and Reach (Private). Some of the above companies only perform certain aspects of what Global-e does. For instance, Reach focuses mostly on payment solutions. I am not sure if all of these smaller competitors will survive and I suspect Global-e will either acquire or merge with a few of the above names just like it acquired Flow Commerce, who was on that above list of competitors before being acquired.

Probably the biggest potential competitor to Global-e Online might be BigCommerce (which also competes with Shopify). However, even BigCommerce doesn’t have its own international D2C logistics operation but instead has listed on its website two preferred logistics partners while also allowing its customers to use Global-e Online for logistics, if they desire. I am not certain that any companies will decide to take the time and make the effort to build out a significant enough international logistics operation in order to compete with Global-e over the long term.

There are really very few companies that do all of the things Global-e Online does in the D2C cross-border space and the ones that do have similar capabilities, it seems that Global-e is not above acquiring them like the recent acquisition of Flow Commerce shows, so I can see this new, fragmented niche area of e-commerce consolidating around one company like Global-e Online over time. Global-e Online management is also on the record as saying that they will use M&A to essentially acquire a customer-base, so I expect over time, even more of the company’s smaller competitors could be acquired.

Risks

As I mentioned in my last article on Global-e, the two biggest knocks on the company currently are that COVID-19 recovery will slow down e-commerce activity and second, that damage to the world’s supply chains would affect Global-e’s ability to deliver products. After Global-e Online almost went parabolic after its IPO moving up into a relatively high valuation, I believe the valuation combined with the above risks have effectively countered the bullish excitement over Shopify, especially as investors began understanding that the Shopify catalyst is something that will take place more over the next several years, rather than rapidly over the next one or two quarters.

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Data by YCharts

While Global-e Online management has advocated a belief that e-commerce will continue gaining market share faster than during pre-pandemic times, that seems to be a more medium-term to long-term assessment and it doesn’t mean that the recovery from the pandemic won’t result in growth deceleration for Global-e in the near-term.

As for supply chain concerns, Co-Founder and CEO Amir Schlachet has indicated during the earnings call that the entire volume of Global-e’s shipments takes place via air transportation and that the company receives priority for their shipments due to the relationships it has with its logistic partner. This doesn’t mean that Global-e will remain unaffected from supply chain concerns. Recently, thousands of flights were cancelled over the Christmas holidays with the excuse from many airlines being that there were not enough pilots. What is happening with passenger planes could also be happening with cargo planes with delays occurring due to not enough airline personnel. So, while over the medium- to long-term, I am relatively certain that Global-e can overcome the above risks mentioned, investors need to be aware that in the short-term, these risks could potentially rise up and bite Global-e Online.

Analyst Price Targets

Analyst Price TargetsSource: Yahoo Finance

The above is based on 9 Wall Street analysts offering 12-month price targets for Global-e Online in the last 3 months. The average price target is $78.56 with a high forecast of $89.00 and a low forecast of $68.00. The average price target represents a 27% increase from the last price of $61.67.

Conclusion

I consider Global-e Online a high risk-high reward investment, as the company has only recently cleared its 180-day lock-up period from its IPO in May. In general, many investors consider recent IPOs risky, especially in the current hot IPO market. Investors with time horizons shorter than a year or who are risk averse should be cautious about entering the stock at current prices, before what is likely to be a volatile CY2022 due to macroeconomic concerns like rising interest rates.

However, aggressive growth investors with a high-risk tolerance should buy Global-e Online hand over fist at current prices. Global-e Online is a high growth company that looks set to continue increasing margins and bottom-line profitability over the next several years. The company has very high upside and is the type of stock that has the possibility to 10X, as the headwinds of supply chain disruptions begin to dissipate.