Sustainability Of Long-Term Business Model Poses Threat For ChannelAdvisor's Public Offering

| About: ChannelAdvisor Corp (ECOM)

ChannelAdvisor (NYSE:ECOM) made its public debut on Thursday, May 23th. Shares of the leading provider of SaaS solutions, which enables its customers to integrate, manage and optimize sales through online channels, ended their first trading day with gains of 31.7% at $18.44 per share. Shares hit intra-day highs of $19.50 per share and have consolidated in a $18-$19 range in the day following the offering.

Despite a successful offering I remain on the sidelines. The long term business model does not seem very sustainable to me, especially if global online sales channels continue to consolidate.

The Public Offering

ChannelAdvisor is a software-as-a-service (NASDAQ:SAAS) solution provider. Its solutions enable its customers to manage merchandise sales across online channels including marketplaces like eBay (NASDAQ:EBAY), (NASDAQ:AMZN), as well as search engines like Google (NASDAQ:GOOG) and social networking sites like Facebook (NASDAQ:FB). With the solutions, clients can manage inventories, optimize pricing, learn about search terms and other information across those channels.

ChannelAdvisor sold 5.75 million shares for $14 a piece. The company raised $80.5 million in gross proceeds with the public offering. The offering values the equity of the company around $287 million.

The offering was quite a success. Initially the firm and its bankers planned to sell the shares in a preliminary price range of $12-$14 per share. Some 28% of the total shares outstanding were offered in the public offering. At Friday's trading levels at $18.69 per share, the firm is valued around $383 million.

The major banks that brought the company public were Goldman Sachs, Stifel, BMO Capital Markets and Raymond James, among others.


ChannelAdvisor's solutions are used by some 1,900 customers worldwide. They manage some 100 million stock-keeping units representing $3.5 billion in gross merchandise value for the year of 2012. The company derives its revenues mainly from subscription fees as well as a variable fee which is based on Gross Merchandise Value processed through the platform. Key customers of the business include Ann Taylor (ANN), J&R Electronics as well as Dell (NASDAQ:DELL), Lenovo (OTCPK:LNVGY) and Sony (NYSE:SNE) in the manufacturing industry.

The company helps retailers and manufacturers to reduce the complexity of highly fragmented online sales channels, where prices and innovation is rapidly changing the market place.

For the year of 2012, ChannelAdvisor generated annual revenues of $53.6 million, up 23.0% on the year. Deferred revenues were actually up by 64.1% to $9.7 million. Net losses widened from $3.9 million to $4.9 million in the meantime.

The company ended its full year of 2012 with $10.9 million in cash and equivalents. The company operates with $11.0 million in short and long term debt, as well as $90.5 million in convertible preferred stock which could dilute the future shareholder base. Factoring in the offering proceeds, the company will operate with a solid net cash position of around $70 million.

Friday's equity valuation of $383 million, values the firm at around 7.1 times annual revenues.

Investment Thesis

As noted above, the public offering of ChannelAdvisor has been quite a success. Shares were offered 7.7% above the midpoint of the preliminary offering range, and are currently exchanging hands at around $18.69 per share, trading some 43.8% above the midpoint of the guided range.

A key risk to the offering is the dependency of the firm on leading sales channels including, eBay and advertisements on Google. Further consolidation of the e-commerce industry could reduce the necessity for ChannelAdvisor's services as a continued consolidation would diminish the complexity of margin online offerings. This could also put pressure on the company's margins. ChannelAdvisor received on average a 1.5% revenue cut based on 2012's annual Gross Merchandise Value.

An obvious opportunity is China, as the company does not sell through Alibaba yet, but this might change. The opportunity is huge, giving that Alibaba is bigger than eBay and combined. The overall global e-commerce industry is expected to grow at an annual 15% rate through 2016, achieving a $1 trillion global size, according to a note from Forrester Research in the company's S1-Filing.

ChannelAdvisor is already achieving profitability in the traditional busy fourth quarter, indicating that it could be able to report full year profits in a not too distant future, given the operating leverage of the firm's business model. Fourth quarter revenues rose by 24.9% to $16.0 million on which the company managed to report a modest $0.6 million profit.

Despite the significant jump following the pricing of the public offering, shares are valued around 7 times last year's revenues, a somewhat acceptable valuation given the premium valuation for recent cloud and e-commerce public offerings.

The company could be a speculative buy following the hype for recent public offerings, yet I remain on the sidelines. It is not even the valuation which concerns me the most, I think that a continued consolidation of online sales channels might make ChannelAdvisor's services obsolete in the medium to long term future.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.