GigaCloud Technology (NASDAQ:GCT) stock has risen on the stock market and is currently demonstrating an “A+” momentum grade. My analysis indicates that the company justifies its significant rally and cash discount The flow simulation underlines the substantial potential for further growth. My optimism stems from the momentum of business expansion, evident in strong revenue momentum and notable improvements in key performance metrics. Additionally, the company’s strengthened balance sheet provides ample resources to sustain investments in innovation. All in all, I give GCT a “Strong Buy” rating.
GigaCloud Technology, through its subsidiaries, offers a B2B marketplace for large e-commerce and parcel players around the world. GCT itself is a holding company incorporated in the Cayman Islands, according to the latest annual filing with the SEC. The company’s fiscal year ends in December. 31 with a single operating segment. GCT generates revenue through three main revenue streams:
- GigaCloud 3P generates service revenue by facilitating transactions between sellers and buyers in the marketplace;
- GigaCloud 1P generates product revenue by selling the company’s inventory on the marketplace;
- Off-platform e-commerce generates product revenue through the sale of the company’s inventory through third-party e-commerce websites.
I prefer to start my financial analysis by zooming out and looking at trends in a company’s financial performance over the past decade, but GCT went public less than two years ago. Therefore, the financial history is relatively short and I will only highlight it briefly.
Revenue compounded with almost 60% CAGR between FY 2019 and 2022, meaning revenue quadrupled in four years. The profitability metrics were very volatile, but I am okay with this as GCT is a young company and sometimes the pace of reinvestments in the business may not be consistent. But what is a strong and essential positive sign is that despite being a young company, GCT generates positive operating margin and free cash flow (FCF) even with the deduction of stock-based compensation (SBC). Based on the company’s cash flow, it raised around $36 million during the IPO, which seems solid but not very significant compared to the cash balance of $214 million as of the last report. The company is financially flexible as it is in a net cash position and has strong liquidity metrics.
The latest quarterly earnings were released on November 30, when GCT confidently beat consensus estimates. Revenue demonstrated a staggering 39% year-over-year growth and adjusted EPS rose from $0.01 to $0.59. The EPS expansion was achieved with the help of strong operating leverage. Gross margin expanded almost ten percentage points and operating margin grew year-on-year from 3.3% to 17.8%.
Revenue growth momentum is expected to accelerate, especially in the fourth quarter of 2023. Consensus estimates project $224 million in fourth-quarter revenue, representing 79% year-over-year growth. Profitability is expected to follow the top line and Adjusted EPS is expected to nearly double from $0.31 to $0.59. Fourth-quarter earnings release is expected to be scheduled for March 15. It’s also important to highlight that GCT reported its quarterly results as a public company only five times and never missed consensus estimates.
According to Statista, the global B2B e-commerce market is huge and five times larger than the B2C e-commerce market. While this could provide good growth opportunities for GCT, it also means that competition is intense. According to the company’s latest annual filing with the SEC, in addition to e-commerce platforms and marketplaces, competitors also include third-party logistics service providers, furniture stores, and large retailers. It’s also worth mentioning that GCT’s scale is substantially smaller compared to giants like Amazon (AMZN), Alibaba (BABA) or Japan’s Rakuten (OTCPK:RKUNF). But at the same time, having a smaller scale gives the company the advantage of being less bureaucratic and being able to implement innovation faster.
GigaCloud is distinguished by its innovative approach throughout the delivery cycle. Instead of coming into play only in the last mile, GCT establishes direct relationships with the “gigasellers” (factories, official distributors), with the aim of minimizing contact points and reducing the profits of intermediaries, thus reducing costs for the end customer. It is worth noting that consolidating all touchpoints under TQM operations requires exceptional operational execution, a goal the company pursues through cutting-edge software technologies. The company’s software framework appears comprehensive and addresses essential elements of the B2B e-commerce process matrix.
I like to evaluate the efficiency of the business model through the prism of critical metrics. For an e-commerce company, arguably the most crucial metric is gross merchandise value (GMV), and from this perspective, GCT demonstrates strong momentum. The constant expansion of the number of active buyers is also an important factor that is likely to drive further growth because a market is like a snowball: the more buyers it attracts, the more sellers are interested in joining the market and vice versa. In my opinion, Seeking Alpha Quant’s stellar “A-” profitability rating for a young company with annual revenue well below $1 billion is also an important indication of the business model’s bright prospects.
Beyond business excellence and innovation, assessing the future prospects of the industry is crucial to assessing the sustainability of TQM. Fortunately, the company’s prospects look promising, as the global B2B e-commerce market is projected to grow at a strong annual rate of 19.2%, providing significant tailwinds for GCT’s continued success.
Overall, I see GCT as a company that has several key advantages. His management’s commitment to innovation and unique business strategies has resulted in notable performance, evidenced by significant revenue growth and increased profitability. With a solid financial position, GCT has ample room to continue investing in innovation and differentiation. Furthermore, these internal strengths are very likely to be supported by secular tailwinds in the coming years.
GCT is on fire with a rally of 456% in the last twelve months and share price appreciation of 60% year to date. I think I don’t need to emphasize the stock’s performance compared to the broader market. From a valuation ratios perspective, the stock doesn’t look too expensive, according to Finding Alpha Quant’s “C-” average grade.
GCT is far from paying dividends, so I think simulating the discounted cash flow (DCF) model is the only solid option to pursue. I will discount GCT cash flows with a WACC of 9% recommended by GuruFocus. Consensus revenue estimates forecast revenue CAGR above 30% for the next two fiscal years. For subsequent years, I use a 10% revenue CAGR. I use a fixed margin of 14.6% TTM FCF ex-SBC for the entire decade.
According to the DCF simulation, the company’s fair value is $5 billion, four times larger than the current market capitalization. That said, I think there is amazing upside potential, even despite the huge rally over the past 12 months.
For cautious investors, I want to emphasize that even factoring in a 10% earnings CAGR for the entire decade, GCT is still several times undervalued. After changing the earnings trajectory to a more conservative one without changing other assumptions, the DCF template indicates that the company’s potential fair value is $3.54 billion, or 195% growth potential.
As a conservative investor, I will use the most conservative scenario to determine my price target. Adjusting the current stock price of $29 by 195% gives me a price target of $85.
Risks to consider
After such a massive and rapid rally, there is always a substantial risk that some investors will begin to take profits and sell their shares. This will inevitably lead to a drop in the share price and new investors should be aware of this. Applying a dollar-cost averaging approach and a long-term mindset is a great combination to address this risk.
Operating an e-commerce platform means GCT faces significant cybersecurity risks. The company holds susceptible information such as customer data, payment details and transaction history. Any breach or compromise of this data damages the trust between GCT and its customers and exposes them to potential identity theft, financial fraud, and other malicious activity. Failure by GCT to protect sensitive data could result in substantial reputational loss or even litigation from its partners.
The company’s aggressive revenue growth is both a promising indicator and a major management challenge. While rapid growth indicates an upward trajectory, it also presents management complexities. This expansion can inadvertently lead to overly optimistic sales forecasts, which could lead to inflated inventory levels if actual revenue falls short of projections. Additionally, pursuing aggressive growth can lead to excessive capital spending, which risks becoming redundant if the company fails to maintain its growth momentum.
To conclude, GCT is a “Strong Buy.” The company’s strong financial position gives it significant flexibility to sustain substantial investments in future growth initiatives. GCT shows formidable momentum in its expansion across crucial business metrics, and its profitability expansion indicates its ability to generate substantial operating leverage and deliver consistent performance. Furthermore, even despite a massive recent rally, I believe the stock still has potential to grow by multiples of its current value.