Gmarket to Benefit From E-commerce Momentum

It’s no secret that e-commerce is on fire once again. This week Amazon (AMZN) impressed investors with a second consecutive blow out quarter. It appears that the long awaited promise of e-commerce has finally materialized. Gmarket (GMKT) appears poised to benefit from the same e-commerce trends that sent shares of Amazon flying this week.

Gmarket has performed well since we first profiled the company in late April, but the recent strength in Asian internet stocks and e-commerce stocks combined with improving fundamentals, should help push shares of Gmarket considerably higher. Previously, we held Gmarket as a short term pick, but now we have decided to add Gmarket to our long term portfolio ahead of the second quarter earnings report next week.

Gmarket reports gross merchandise value [GMV] a few weeks before reporting earnings so we have some numbers to work with heading into next week. GMV represents the total value of all items sold on Gmarket’s website. For the second quarter of 2007, Gmarket reported a GMV of 780 billion won. This GMV represents an 8% sequential increase in revenue. Last quarter revenue from transaction fees came in at 30.2 billion won. Using the same ratio, transaction revenue should come in at 32.58 billion won for the second quarter of 2007.

Recently, advertising and other non-transaction revenues have been growing faster than transaction related revenues at Gmarket. Last quarter advertising and non-transaction fee related revenue came in at 17.8 billion won, an increase of 114% compared to Q1 2006. If we assume that non-transaction revenue will increase by 50% in Q2 2007 compared to Q2 2006, then non-transaction revenue will come in at about 19.28 billion won. Therefore, after making the preceding growth assumptions, total revenue would come in at 52.4 billion won.

The current won to US dollar exchange rate is 915 won for $1 US dollar. Last quarter the rate was 937 won per $1 US dollar. The weakening US dollar should help Gmarket’s numbers when reported in US dollars. Four US analysts follow Gmarket and all of them report estimates in US dollars. None of these analysts have updated their numbers in the last 90 days despite a weakening US dollar that should help Gmarket’s numbers compared to estimates when the company reports.

Second quarter revenue in US dollars would come in at $57.26 million if we assume a 50% increase in non-transaction revenues compared to Q2 2006 and an 8% sequential increase in transaction related revenues. We think a 50% increase in non-transaction related revenue is a conservative estimate, but even with this estimate, Gmarket would handily beat the consensus analyst estimate of $56.85 million. If Gmarket can increase non-transaction revenues by more than 50%, investors could be in for a Bidu or Amazon type surge in Gmarket shares.

Bidu (BIDU) reported a great quarter yesterday with revenue coming in at 401.3 million Yuan ($52.7 million). Just like Gmarket, Bidu’s numbers were helped by the weakening US dollar. Last quarter $1 was worth 7.73 Yuan; today $1 is worth 7.56 Yuan.

For Bidu, $52.7 million in revenue was enough to send the stock flying higher, up 19% in the after hours alone. This move propelled Bidu’s market cap to a lofty $7.35 billion. Analysts expect Gmarket to have second quarter revenues of $56.85 million (we think it will be closer to $58 million) and Gmarket has a market cap of $1 billion. Let’s review, Bidu has a market cap that is seven times larger than Gmarket, but it has lower revenues. We all know that the market pays a big premium for growth stocks. Therefore, does Bidu have projected growth numbers that justify the divergence in market cap from Gmarket? Not according to the analysts. The analysts that cover Bidu expect 68.5% revenue growth this year and 48.3% per year growth for the next five years. The analysts covering Gmarket expect 78.4% growth this year and 42% growth per year for the next five years.

For this quarter, Gmarket is poised to benefit from strong demand for e-commerce and a favorable exchange rate. For the long run, Gmarket will benefit from a dominant position in Korean e-commerce and a planned expansion into other Asian markets. Gmarket’s valuation is favorable when compared to other e-commerce stocks and Asian internet stocks. In short, this looks like a great time to buy Gmarket.

Suggested Trades:

* BUY GMKT near $20.05 (long term portfolio)

Full Disclosure: Wall Street Mayhem is long Gmarket

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