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Summary

  • Successful IPO for this global trade management solution provider.
  • Growth is accelerating thanks to acquisitions while losses are increasing.
  • High valuation, modest growth and losses result in downside risks.

Amber Road (NYSE:AMBR) has a mission to change the way in which companies conduct global trade. The company provides cloud-based global trade solutions by automating import and export processes in an efficient, compliant and profitable way.

The company has seen its public offering about a month ago in what has been a success. I must say that I am surprised by the enthusiasm surrounding the company as I believe that the high valuation results in downside risks.

The Public Offering

Amber Road offers a combination of software, sourced trade content and transportation solutions in a global supply chain network. Amber Road delivers its global trade management (GTM) solutions based on the Software-as-a-Service model.

This creates a flexible and low cost solution for companies to use, while resulting in recurring revenues for the company itself. This business model is favored by many investors as it results in reliable and constant cash flows rather than big lump-sump revenues.

Amber Road sold 7.4 million shares for $13 apiece, thereby raising $96 million in gross proceeds. The company sold 4.8 million shares and thereby raised $62 million in gross proceeds while the remainder of the shares were offered by selling shareholders; some 30% of the total shares outstanding were offered in the public offering.

Demand for the offering was strong as Amber Road initially aimed to sell just 6.5 million shares in a preliminary price range of $10.50-$12.50 per share. Trading at $14.90 based on Monday's closing price, the equity in the chain is valued at $385 million.

The major banks that brought the company public were Stifel (NYSE:SF), Pacific Crest Securities, Canaccord Genuity (OTCPK:CCORF), Needham & Company and Raymond James (NYSE:RJF).

Valuation

Amber Road operates in a huge and growing market. The company cites the U.S. Department of Commerce in its S1-filing which shows that U.S. companies imported $2.3 trillion in goods in 2012, while exporting $1.5 trillion worth of goods. The Chinese imports and exports are reportedly even bigger, a reason why Amber Road acquired a Chinese SaaS global trade manager names EasyCargo in 2013. The company paid $2 million in cash and offered 450,000 shares in Amber to acquire the Chinese business.

Besides greater trade volumes, complexity is increasing as well with shipments having to deal with multiple logistical parties, languages, time zones, currencies, regulations etc. Efficient global trade management is important for companies to ensure reliable deliveries with a world being hooked in just-in-time supply chain operations.

The ARC Advisory Group estimates that the market for GTM solutions was $6.1 billion in 2012. It is this market in which Amber Road considers itself a market leader.

In 2013 Amber Road generated revenues of $52.5 million which was up by 21.1% on the year before. The increase in revenues resulted in rapidly expanding losses. Net losses rose from $6.7 million in 2012 towards $19.2 million over the last year.

It is important for investors to notice the accelerating revenue trends which undoubtedly were aided by the acquisition of EasyCargo. Fourth quarter revenues rose by 38.2% to $15.6 million as losses stabilized around $0.5 million.

Amber Road held roughly $5 million in cash before the offering took place while not having any debt outstanding. Including $62 million in gross proceeds this means that Amber Road's operating assets are valued around $325 million. This values operating assets of the business at little over 6 times annual revenues.

Investment Thesis

As noted above, Amber Road has seen a reasonably strong offering. Shares were offered at $13 per share, some 13.0% above the midpoint of the preliminary offering range. Shares did see a nice opening day jump and have settled in a $14-$17 trading range in the month following the offering, generating solid returns for first day investors.

I am a little surprised by the strong performance of Amber Road's public offering. Stiff competition, including that of large companies with vast resources such as SAP (NYSE:SAP) and Oracle (NYSE:ORCL) are key risks. Other risks include the large and increasing losses, possibly inaccurate information of third party suppliers, and the very complex market in which the company operates. The latter can result in quite some operational risks.

To illustrate Amber Road's challenges: it has some 463 customers at the end of 2013, resulting in average revenues of just $113k per customer even as its customer base includes prominent names like General Electric (NYSE:GE) and Monsanto (NYSE:MON). Servicing these clients might actually be quite intensive given the complexity of some of the services, putting pressure on potential operating margins.

I am not convinced about this offering as topline growth has not been that impressive, while fourth quarter revenue growth was inflated through recent acquisitions. Combined with expanding losses, I remain very cautious despite the early signs of success on the stock market.

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.

Source: Amber Road - Successful Public Offering, But Risks Remain Down The Road