Borderfree (NASDAQ:BRDR) began trading on Friday on the Nasdaq with gains of more than 25% during its IPO. Surprisingly, 25% IPO gains is somewhat conservative given the large demand for IPOs in the last year. Still, when you look at the business model of Borderfree, combined with its fundamentals, it seems that not only did underwriters price it well, but that there's also a lot of long-term upside.
The business of Borderfree
Borderfree is a global ecommerce platform for retailers, describing itself as a "partner that U.S. brands rely on to expand internationally. We break down barriers to find revenue for your company in every corner of the world - helping you sell to anyone, anywhere."
The company has nearly 100 customers, which include J. Crew, Macy's, and Under Armour. Borderfree collects revenue as a percentage of the sales created on its platform. And in 2013, the company saw revenue of $110 million, or growth of 34%. However, much like backlog revenue is important for software-as-a-service companies, Borderfree's gross merchandise volume increased 48% last year, signaling strong growth and prolonged revenue.
At $20, Borderfree is trading with a market cap of just over $600 million, a price times sales ratio of 5.50.
FedEx plus eBay equals Borderfree
In trying to understand the essence of what Borderfree provides as a service, I urge you to think about companies like eBay and FedEx.
In regards to eBay (NASDAQ:EBAY), it does not use Borderfree's service, as it already has a strong e-commerce platform. Essentially, Borderfree's service is more for brick-and-mortar retailers who have an online format, but want to enter global markets; Borderfree can sell merchandise in 100 countries using 60 different currencies. Thus, Borderfree is a payment processing service, much like eBay's PayPal.
Borderfree said in its S-1 that cross-border consumers are expected to spend $24 billion on goods from the U.S., and that this market will grow to $44 billion in 2018. Borderfree is giving its customers a way to capitalize on this available market, a way to convert prices, currencies, and to collect payments. This is a valuable service as emerging markets continue to develop, and gives Borderfree great long-term growth potential.
In regards to the PayPal and Borderfree comparison, one key difference is that PayPal collects fees from the consumer while Borderfree earns revenue from its clients. Over the last year, payment processing has become a competitive space in the U.S., and eBay is at constant risk of consumers finding a cheaper, better, or more accessible option. But for Borderfree, its customers are locked into multi-year contracts upon joining, which is followed by one-year renewals. This removes the natural risk of being a payment processing company that's dependent on the consumer.
After Borderfree converts prices and currency and collects payments, it then processes and tracks parcels for its client as a service to the consumer. Hence, it has a touch of transportation or logistics within its business model, which also earns the company revenue. Unlike FedEx (NYSE:FDX), Borderfree does not own its own trucks. In fact, Borderfree is considered an asset-light business, meaning it's the connection it provides that becomes valuable, rather than the actual service.
Serious growth potential
If you think about the next 10 years, what is likely to be a bigger growth market than global e-commerce? We've already witnessed its widespread growth in North America, and typically, this is a good indication of how companies will approach global business. This should bode well for Borderfree long term.
Also, Borderfree's IPO will help it in accelerating growth and meeting its long-term goals. The company raised $75 million in its IPO, which will help with traffic conversion and acquisitions, two key areas of concentration for the company.
Borderfree estimates that its platform accounted for an average of 1.7% of its customers' total e-commerce sales. However, those same customers received 21% of their visitor traffic from international customers. This shows a large gap for Borderfree to improve its platform and to convert traffic into dollars, which can be achieved through R&D and with the cash position gained in its IPO.
Borderfree also considers strategic acquisitions of customers and competitors to be important in its growth goals. The company mentions in its S-1 on many occasions that its industry is highly fragmented, meaning there are a lot of smaller competitors that work with far fewer customers, and Borderfree will be able to use its cash to make acquisitions in companies with growth that can expand it into new markets, or that offer other valuable services.
The acquisition of customers is more about educating companies on the opportunities that exist, which also cost money. Borderfree estimates that only 60% of the internet's top retailers sell internationally, showing that international e-commerce is not only a growth industry, but one with a lot of upside in terms of adding new customers.
Borderfree has much of what investors seek in a growth company. It is a leader in a fast-growing and large market, offering services that are innovative and useful to its customers. With a price to sales ratio of 5.5, Borderfree is not expensive relative to many growth companies that operate through the web, nor does it trade with premiums of companies that sell software as a service like Workday (NYSE:WDAY) or NetSuite (NYSE:N).
Lastly, and perhaps most importantly, its IPO gives it a larger cash position to make investments that will and can translate into accelerated growth. When you put it all together you have a company that's attractively priced with the potential to trade considerably higher, both short and long term. All in all, Borderfree remains a great post-IPO opportunity, which is something we can't say too often.
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. I have no business relationship with any company whose stock is mentioned in this article.