Global-e: Occupying A Substantial Niche In The E-Commerce Firmament
Summary
- Global-e is the leading vendor in a market segment called cross-border e-commerce.
- It offers merchants and brands the ability to address international e-commerce opportunities through what is called the D2C ( Direct to Consumer) paradigm.
- The company has achieved exceptional growth, and has recently been increasing its revenues by near triple digit rates.
- The company has achieved a marginal level of profitability and free cash flow.
- The company has an excellent competitive position and it partners with Shopify as that company's chosen vendor in this space.
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Global-e - How some on-line merchants go global
These days there are any number of e-commerce platforms. They range from Amazon (AMZN), the behemoth in the space, and still sprightly enough to achieve substantial growth, to Shopify (SHOP), the class of the most recent generation of offerings, to many, many niche vendors, some focused on foreign geos such as Mercado Libre (MELI), and other platforms that have become increasingly heterogeneous such as Square (SQ). Some payment processors such as Shift4 (FOUR) now offer their own e-commerce platforms.
Writing yet another article commending either Amazon or Shopify as a category leader is more akin to exercising some tired electrons than in creating investment insights, at least in my opinion. It is hard for me to imagine that there is any relevant fact about those two vendors that hasn’t been explored and re-explored several times. How long will the growth for those companies going to continue to achieve hyper status. and what might be the path of their free cash flow margins are subjects on which there have been and will be endless debate. Not having a trusty crystal ball, I am going to leave that debate to others-just when, and to what extent, either of those giants see slowing growth beyond that which has already been estimated, is a puzzle that I do not know how to solve. I think it should be clear to most investors that both companies have a growth culture that has enabled them to develop strategies that will enable sustained growth for many years and while not currently a holder of either of these companies, they are excellent investments for many who want growth, but not the volatility that comes with identifying and investing in emerging businesses.
So, I have turned my attention to other nooks and crannies within e-commerce that might have the potential to produce major winners, even from this point-mainly because they are in a relatively dusty corner of the space, and their potential has yet to be recognized. In my opinion, Global-e (NASDAQ:GLBE) is such a name, and I will spend the balance of this article exploring this company’s background, business, outlook and valuation.
Since the time I started writing this, the market has returned to a phase in which growth stocks have seen weak performance as investors fret about inflation, and interest rates and the Fed's taper agenda. It is unknowable to this writer just how long and to what extent these concerns will constrain valuations. The sector rotation that limited the share valuation of many names this past winter/spring is still fresh in the memories of many. While Friday's rally was noticeable, Cloud names were still laggards, and many finished down and not up, and most gains amongst hi-growth names were less than for the broad market.
Global-e is a high growth business and its valuation reflects expectations of a continuation of that growth. But there can be some market phases in which fundamental operational performance is disregarded and investors seek safety and ignore growth. I think the basic concept of the Fed Governors that speaks to inflation being transitory will prove correct-supply chain bottlenecks will be solved and there is no existential shortage of most commodities. But mood swings are not easy to forecast and I am loathe to do so. I expect Global-e to grow at rates in high-double digits for some time to come and for it to achieve a rising free cash flow margin as well. But the share valuation will obviously be constrained for the period in which investors are concerned about interest rates and inflationary expectations to the exclusion of most anything else.
The shares lost 5% this past week, and they have seen a valuation compression of about 14% since they made a high at the start of September. Notionally, the shares aren't "cheap," and I have no expectation that their performance will be stellar in a risk-off environment.
But as I am and plan to remain a long term investor, I will, to a greater or lesser extent try to minimize my attention on what is moving the market today or tomorrow and focus on the investment attributes of this company-of which there are many. But I will be prudent in building a sizeable position while the market is focused on macro concerns as is currently the case.
Who is Global-e and what do they do?
In this case, the name is quite descriptive. Global-e describes itself as the world’s leading platform to enable and accelerate global, direct-to-consumer, cross-border e-commerce growth. The concept is that the Global-e platform allows on-line sellers to offer their products and services internationally on the same basis that they offer their wares locally. Simply put, sellers using the Global-e platform can offer their products and services in many different countries, without the costs and the time involved in setting up a host of international subsidiaries. If a brand such as Marc Jacobs or a merchant such as Marks & Spencer wants to expand its international presence in a seamless fashion, with appropriate localization, cross-border expertise and local market knowledge, the Global-e offering facilitates that process. Last quarter, the company initiated the launch of brands such as Tag Heuer, Sephora and Rimowa which are all parts of the LVMH luxury brand portfolio which has been a long-time Global-e user.
As is the case with Affirm (AFRM), a name that this writer recommended a few months ago, and for partly the same reason, the company has a partnership with Shopify. Shopify bought 7.75 million shares of the company’s stock and its agreement, which runs for 3 years, makes Global-e its exclusive external provider for all of its 1.7 million merchants who run their stores on its platforms. The terms of the agreement haven’t been completely disclosed; in additional to Shopify’s direct investment, it got warrants to buy another 20 million shares, essentially at no cost, so it is a substantial owner of Global-e.
The company, which is domiciled in Israel, went public this spring. The IPO was for 15 million shares + the over-allotment taken by the underwriter. The shares were priced at $25 and the market cap based on that price, was $3.6 billion. Less than 5 months and two earnings releases later, the shares are now selling for around $71/share. The shares have been in a holding pattern for the last 2 months, after the torrid pace of appreciation in its first months as a public vendor. Some of the share price momentum was blunted when the company sold a secondary of an additional 15.6 million shares by selling shareholders at $64.
The reason behind the torrid pace of share price appreciation is pretty simple; the company has essentially been experiencing growth at near triple digit rates, and that is even when compared against the results reported when the impacts of the pandemic were at their height and e-commerce volumes around the world were spiking. This is a company that facilitates retail transactions, and thus its business is typically seasonal, and thus sequential comparisons are not necessarily relevant. Last year, for example, GMV rose by 61% between Q3 and Q4, and then fell by 15% sequentially between Q4 and Q1, before rising by 23% between Q1 and Q2. So, the most relevant comparison is year over year; revenues almost doubled year-on-year last quarter and rose by 130% year-on-year in Q1. The impacts of the pandemic on specific quarterly revenues and revenue comparisons are obviously difficult to judge; most relevant, I think, is that sales are growing very strongly in current periods-even when comparing against the results of the pandemic influenced spike in e-commerce revenues in 2020.
Global-e has a somewhat complex capitalization structure with outstanding shares, convertible preferred shares, and shares that can be converted by Shopify as part of its agreement with Global-e. Based on the table in the latest prospectus issued to facilitate the registered secondary, the company has about 140 million outstanding shares, although it used 88 million outstanding shares as the divisor in its calculation when it reported earnings for the June ending quarter. As of June 30th, there were 72 million convertible preferred shares and 11 million share options.
The Cross-Border e-commerce space
It is probably not terribly surprising to find that the cross-border e-commerce space is one of enormous potential. While it is difficult to call anything in e-commerce a dusty corner, if there is a such a place, cross-border e-commerce would be it. There are reasons for that. One is that the obvious way to sell cross-border is through the use of an existing e-commerce platform. The other factor is that of complexity and localization required to sell cross-border. It is not nearly as straightforward as is setting up a web site, contracting with payment and logistical services, and fulfilling orders. Merchants and brands obviously have the desire to sell on a global basis if the economics work-what they do not have is the ability to do so in an expedient fashion. Consumers are increasingly global in their brand preferences. And there are substantial difficulties for many brands and merchants in connecting with prospective customers outside of their native countries.
The market in which Global-e competes is best described as cross-border E-Commerce. Three things to note about the cross-border space. The space is huge. Forrester says the opportunity is $736 billion as of 2023. Of course that represents the sales of product, rather than the software and services necessary to sell into the cross border space. Other studies suggest that the space is $900 billion and others forecast even greater amounts. Most of the forecast have been too low, and the growth rates have been consistently greater than has been forecast. Here is one that is massive. Second, the growth rate of cross-border e-commerce is twice or more greater than other components of on-line retail. And thirdly, implementing cross-border E-Commerce solutions correctly is a very complex process with many different facets. It is hard to do right, and most brands and merchants will not be able to do it on their own.
There are different ways for a brand to reach international customers. Obviously, as mentioned above, there are plenty of local e-commerce solutions. Amazon sells in a variety of countries, some through subsidiaries such as Souq, and others under its own name such as in India and most European countries, and recently Australia. Mercado Libre is probably the largest e-commerce platform in Latin America, and its revenue growth has been prodigious the last several years. It is hardly any secret that Alibaba (BABA) is probably the world’s largest e-commerce platform although it operates in so many different business segments it can be difficult to estimate its “pure” e-commerce revenues.
But not all brands are going to be able to profitably sell their products using local platforms that are available, and almost, inevitably, brands, if they can go directly and sell through their own local platform , are going to be able to substantially increase their revenues. Most merchants, of course, are simply too small to successfully navigate the web of complexity necessary to bring their offerings outside of their home country. There are just so many issues in terms of localization, logistics, remittances, regulations, and support, such that a merchant who specializes in selling aromatherapy and candles from CA has had no way of selling direct in France…until very recently.
The cross-border e-commerce space is showing growth of well above 20% according to the linked survey-considerably faster than the growth of e-commerce as a whole. The survey I have linked to here also highlights some specific results that merchants/brands have when they adopt what is called a direct-to-consumer (D2C) model. Of course this survey is part of is a commercial put together by a specific vendor, ESW, a competitor of Global-e, but the conclusions to be drawn as to why Global-e has been and likely will be successful in achieving hyper-growth are pretty straightforward.
Essentially, brands see dramatically higher sales if they are able to offer a D2C model. In the linked study, revenues turned out to be something on the order of 70%-85% greater than the initial expectations of the brand. There were also operational cost savings, additional countries activated and a substantial speed-up in the process of starting to sell.
What’s Involved in facilitating cross-border e-commerce
The fact is that most merchants and brands simply haven’t the resources or the expertise to set up their own B2C service in any single country, let alone dozens or a couple of hundred individual geos. Global-e’s service affords its customers support in several areas that are necessary for brands and merchants to sell on a cross-border basis.
The services that Global-e offers include the following capabilities:
- Helping customers, i.e. the brands and the on-line stores, provide the appropriate marketing message and checkout instructions in the local language in a form acceptable to end-use consumers;
- Pricing-Global E’s B2C service involves supporting a pricing engine that is based on more than 100 currencies which is customized according to location, local market conventions and of course the pricing strategy of the merchant and/or the brand;
- Payments-The Global-e Service supports over 150 different payment methods and allows sellers to get paid in a currency that is convenient for their business;
- Duties and Taxes: Global-e pre-calculates import duties and taxes and can remit these taxes and duties in over 170 destination markets, which simplifies customs clearance issues and affords GBLE’s clients with a guaranteed landed price quote. Global-e’s software ensures that its clients remain compliant with all significant import regulations.
- Delivery-Global-e has contracted with 20 different carriers and is able to offer its customers a large variety of fulfillment options that meet local preferences.
- After-sale support and returns-most shoppers will not elect to engage with a D2C model that can’t offer some kind of return capability. Many markets, India being one example, are oriented toward customers picking up merchandise at a local store. Global-e can solve these kinds of issues for its clients.
The reasons that Shopify apparently chose to partner with Global-e was basically that the company could offer its merchants a rather extensive menu of cross-border services. Shopify wants to see its merchant clients succeed and one way to do so is for them to be able to sell cross-border using a proven technology. They found that GLBE was a vendor that filled the requirements of successfully facilitating cross-border e-commerce.
Basically, with the services that are offered by GLBE, the shopping experience a local shopper can experiences is essentially equivalent to the shopping experience offered by local brands. These capabilities have lead to a substantial increase in terms of sales conversions on the sites of Global-e customers, and it has given merchants and brands the opportunity to expand to multiple geos in a timely fashion.
Global-e offers its clients something it describes as Smart Insights. These insights are a form of basic analytics that merchants can use to improve their offers to clients in different geos. Smart Insights appears to be a formidable selling tool-there really is no other feasible way for Global-e’s customers to collect the quantity of data that is generated by several hundred million visits and the millions of transactions that go across the Global-e network.
Global-e Competitors
Global-e confronts many competitors across its cross-border space. The space is large, it is growing very rapidly, and the runway seems to be quite long. I have linked here to a list compiled by a market research entity which reviews the top competitors in the space.
While the direct competitors typically get most of the focus on the part of analysts and other commentators, the reality of competition is that most of it comes from companies who try to set up their own direct D2C solutions. Not all merchants appreciate that outsourcing something like cross border e-commerce is a realistic alternative. I think, over time, most merchants, and most brands, except for the very largest, will find the economics of outsourcing cross border D2C simply irresistible. Merchants are good at finding products to sell and selling them. The kinds of things a company such as GLBE does, such as localization of messaging, localizing pricing, compliance, payment of duties and other taxes, shipping, and post-sale service are simply not the things that distinguish most brands and merchants.
There are, of course, other ways to sell cross-border. Typically, a merchant looking to expand internationally, would initially consider using a traditional distributor who might carry products in a legacy brick and mortar store. There are serious limitations to this approach including availability of all products and models offered by a brand, and there is no direct interaction between a brand and a customer. Almost inevitably, the discount that is necessary to sell in that fashion is very substantial.
Another competitive option is selling through the proliferation of available on-line marketplaces. It is not readily apparent if D2C is more economic than selling through on-line market places. Take rates vary, and can be significant. What is obvious, however, is that on-line marketplaces do nothing to connect a brand and customers and this is considered to be a significant limitation of the on-line marketplace paradigm for international e-commerce.
One major competitive factor in this space will be the Global-e’s partnership with Shopify. The company increased its merchant count by 56% to 442 in 2020. At the moment, the partnership with Shopify is based on standard API’s; the company has similar integrations that allow users to incorporate Global-e with other significant platforms such as SAP (SAP), DHL, Big Commerce (BIGC), WooCommerce, PayPal (PYPL) and Facebook (FB). Most of these integrations are quite basic; and that is the case with the current Shopify integration. But Shopify and Global-e are in the process of building out a purpose built integration that should be available later this year. During the latest conference call, Global-e indicated that it was starting to see some smaller Shopify merchants sign up for its service. The more important upside should come after the purpose built integration launches, and larger users start to adopt the GLBE solution at an increasing cadence. The current estimates for this company do not seem to factor in the strong tailwind a purpose built integration with Shopify is likely to create.
The partnerships with both DHL and Facebook are more than just basic integrations. DHL is used as part of GLBE’s shipping solution, while FB and GLBE cross-refer customers. Overall, management, on its latest conference call spoke to an increased rate of customer acquisition and an increase in pipelines from Shopify users-at this point the new merchants coming to Global-e from the Shopify partnership are mainly in the SMB space. Given the typical time between sign-up and deployment, it seems likely that substantial revenue growth tailwinds from the Shopify partnership will be most seen in the 2nd half of the coming year. The company did not report specific numbers with regards to customer count, and revenue percentages coming from larger users.
Most of the company’s competitive advantages are ones of scale and first mover advantage. There are some readers who obviously like to see advantages and moats based on technology. Given the nature of the services that are provided, it would be surprising if there was something unique and proprietary in what Global-e does, although perhaps its Smart Insights offering is a bit unique. There simply are some basic requirements necessary for any vendor to establish a credible D2C offering to any customers. What I believe to be unique for this company is its geographical scope and the many services it offers users on a single platform.
Because of Global-e's integrated platform, it has economies of scale which enable the company to aggregate a substantial data set that is not likely duplicated by any potential competitor. And the company is able to take advantage of its flywheel such that its offerings and its data advantage typically help users grow their sales more rapidly, which in turn allows them to expand their cross-border offerings to new geos-and while difficult to validate, this company apparently has the ability to support D2C cross border commerce in more countries than any other competitor.
The company does not generally report retention rates. But in the F-1 (the equivalent of an S-1 for foreign domiciled filers), the equivalent metric to DBE was reported to be greater than 140% and in the latest conference call management said that the equivalent of the DBE ratio had remained consistent with earlier levels.
In looking at competitive positioning and thinking about longer term growth rates, that kind of ratio is significant in my own thinking. It is clear, I think, that users reap substantial benefits and enjoy strong ROI through setting up a D2C selling motion using Global-e.
Overall, there will almost certainly be more than a single winner in the market for cross-border retail solutions. I don’t think it is necessary to suggest that Global-e has the only viable offering in the space. The company will sell its leadership role, its overall scale, and geographical spread and its Smart Insights capabilities its messaging to merchants. And being backed by Shopify creates an aura of success that is hard to overestimate. Because of its scale, this company is going to be able to develop a unique level of domain expertise in solving the myriad of issues that will arise from building a cross-border capability, and there is nothing like domain expertise as a competitive advantage and as part of a competitive moat.
Some of the current Global-e growth drivers
Obviously the central questions for prospective investors and holders of Global-e shares relate to the growth rates for the company and of course its ultimate business model. As the shares of Global-e have just recently started trading, and the float is currently 50 million shares, the company is only covered by a few analysts. Their collective revenue growth forecast for 2022 is 54%. That is probably a material underestimate. While management hasn’t provided a discrete forecast of CAGR, the company CFO on the last conference call did talk about growth prospects being in the high double digit range. That said, the specific forecast the company has provided for the quarter that closes this week is for revenues of about $55 million, which would be growth of 67% year on year, and would essentially be flat with the revenues reported for Q2 of $57 million. I would imagine that the company will actually report results substantially greater than the current forecast for the quarter given the methodology it uses in providing guidance.
The company’s implied forecast for Q4 is for revenue of about $73 million. That would be growth of 38% year on year and it would bring the full year growth rate to 69%. My guess is that management looked at full year growth of 70% as a reasonable point for a public forecast and worked backward in terms of creating guidance. I have every reason to believe that the company will continue to grow at high double digit rates both for the balance of this year and on into the future, with some seasonal variations-particularly for the Christmas shopping season and its aftermath.
The company’s guidance that it explicitly articulates, as was implied during the course of the conference call, is primarily a function of clients already integrated and live on the platform. Almost inevitably, as there are additional go-lives on the platform, this will lead to revenues surpassing what passes for a forecast.
Much of the growth for this company at the current time is a function of larger retailers choosing to expand their relationships with Global-e. For example, in Q2, the company announced new relationships with Tag Heuer, Sephora and Rimowa. (Tag Heuer is a well-known Swiss watch brand, Sephora is a French brand of cosmetics and beauty products and Rimowa is a high-end luggage brand with headquarters in Germany.) These are all components of the LVMH Group (LVMH.TI) which has been a customer of GLBE for some years. Subsequent to the launch of the Tag Heuer brand, that organization expanded its relationship with GLBE to many additional destination markets.
Another major expansion from an organization that recently started with GLBE was Marks and Spencer which initiated began working with GLBE a couple of years ago. It launched its D2C offering last quarter and then added 47 new destination markets this quarter. The company currently offers its clients service in 200 destination markets world-wide, probably the broadest geographic reach of any provider in this space and one reason that it is able to maintain a strong DBE ratio. As mentioned, the CFO has said on the call that it will not be company practice to report the equivalent of DBE ratios going forward. But they were apparently in the range of 140% last quarter and there is no reason to anticipate any slackening of the ratio in the near future.
The GLBE service enhances sales growth for its clients at a substantial pace and builds brand awareness. The F-1 filing is replete with case studies documenting the companies that have deployed the service and which have gotten favorable results, and have a strong incentive to use Global-e services in additional markets and for additional brands. The growth of reference customers has a kind of flywheel impact, fostering additional growth with other users-I think some of that is happening now, particularly with luxury brands, all of which are attempting to reach out to their customers and establish direct relationships.
Currently, this company spends an extraordinarily small amount on sales and marketing-less than $5 million last quarter on a non-GAAP basis that excludes amortization of the Shopify warrants, although that level, tiny as it was, was more than double the year earlier level. The company talks about lean and efficient sales teams-this seems a bit leaner than optimal-sales cycles are fairly short and given the high DBE ratio it seems acquiring customers ought to be a priority. In the F-! the company said that its payback on sales and marketing spend was less than 6 months which brings the question-why not spend more on sales and marketing? The company doesn’t report quarterly new customer data; management did say it had a strong pipeline of new brands and merchants it expects to close through the end of the year.
Given the nature of the service it provides, verticalization has been a key strategy. I confess to being less than a complete brand name shopper so some of the brands that are listed as references are unknown to me. The company specializes in fashion, health and beauty merchandise, and luxury items. The company has many opportunities in terms of new verticals and new geos. The company is just now opening up its Asia/Pacific presence and it launched last quarter with its first Asia/Pacific merchant, Theory Hong Kong (Theory is a retailer that sells what is described as that company’s proprietary line of trendy, tailored apparel-so it fits in GLBE’s strongest vertical. It actually is a subsidiary of a New York based fashion label.) The company is apparently preparing to launch a consumer electronics vertical either through internal processes or through an acquisition.
The company has a strategy to be acquisitive in order to accelerate its entry into new verticals, new geos and new services. One of the co-founders of GLBE, Nir Debbi has recently shifted roles a bit, and now is responsible for business development as well as revenue generation. Just reviewing the opportunities for expansion, the growth runway for this company seems as strong as most anything else in the e-commerce world.
The Global-e business model
Global-e is modestly profitable at this point on a non-GAAP basis which eliminates the amortization of the warrants the company gave to Shopify as part of its partnership agreement. I use the Shopify warrants as part of my share count to establish a valuation level, and thus eliminate the amortization as part of an earnings calculation.
Global-e does not have, and will not have, the traditional model of a software company. It delivers some physical services, particularly logistics and after-sale services as part of its offering. The company generates revenues from both service fees and fulfillment services. Most of the customers opt for GLBE to handle their logistics, but it is an optional service. In the last few quarters, service fees have grown more rapidly than fulfillment services due to a mix trend toward luxury items. In general, luxury items generate higher GMV on which service fees are based, and somewhat less in the way of logistics costs which are reported as fulfillment services. This has the effect of marginally reducing the reported revenue growth rate, and increasing the gross margin.
As mentioned, service fees are generated as a percentage of GMV. Overall, last quarter, GMV rose by 95%, total revenues rose by 92% and service fee revenue rose by 104%. Overall, gross margins were 36% of revenues compared to 32.4% of revenues in the prior year. The company has forecast consistent improvements in gross margins as it scales its business and improves operational processes and enjoys a benign pricing environment. The service fee take rate was 6.4% last quarter compared to 6% in the year earlier quarter.
Global-e is also far less US centric than most other software companies, but that is changing. Last quarter, US based outbound revenues rose by 131%. One reason for anticipating strong future revenue growth is that the company has barely scratched the surface in terms of acquiring US brands and merchants. Last quarter, US outbound revenues rose to 29% of the total from 25% in the prior year period. Perhaps surprisingly, the UK has been the principal location for the company’s outbound sales revenues. Presumably this is a function of the Marks & Spencer relationship. Even though UK revenues rose by 50% last quarter, the share it had in the source of revenues fell to 48%, while revenues from the EU rose from 13% to 22% of the total. Israel, the company’s HQ, so far has not represented a meaningful source of outbound revenues.
The company’s opex ratios are very low compared to those of traditional high-growth IT vendors, which has allowed the company to generate non-GAAP profitability far earlier than many other tech IPO’s. The company’s stock based comp expense has been low, so the numbers presented here are GAAP. Overall, operating expenses were 26% of revenues this year, compared to 27.5% of revenues last year. Within those expenses, general and administrative costs rose by 59%, sales and marketing expense more than doubled and research and development expense rose by 58%. General and administrative expense was probably inflated this last quarter because of the company’s IPO expenses.
The company’s free cash flow margin is modest at this point. For the most part, free cash flow should roughly equal non-GAAP profitability over the course of a year. Differences in a particular quarter are going to be basically balance sheet items.
Wrapping Up-Global-e’s valuation and its management.
Global-e appears to have an attractive valuation based on the growth it has been able to generate and its early turn toward profitability and cashflow generation. I have used a 4 quarter forward revenue estimate of $350 million; as discussed earlier, I think company guidance is far below realistic expectations and doesn’t include substantial revenues from newer users. As I write this on Oct. 1, 2021, the company’s share price is about $71 and my calculation is based on 140 million outstanding shares. That brings my expected EV/S ratio to about 27.6X.
The real question of course is the company’s growth cohort. I have used a 3 year CAGR of 58%. Given the economics that Global-e offers clients, my guess is that management's expectations for growth at high double digit rates are quite reasonable, but I chose to be conservative. Using a 58% CAGR brings the company’s EV/S ratio to about 27X, 30% below average for that growth cohort. Company management has spoken of a long-term revenue growth expectation in the high double digits percent. As mentioned earlier in this article, while GLBE’s full year guidance of about 70% revenue growth is near such an expectation, its quarterly forecasts are far less than that. And the 1st Call consensus for next year has revenue growth at 54%.
I think my 58% CAGR is most probably conservative based on the opportunities this company has, its strong competitive position, and its ability to help its clients substantially increase their revenues. I expect that the company’s margins will expand noticeably over the next several years as it reaches decent scale, enjoys the fruits of its partnership with Shopify, and continues to improve its operational processes in terms of the logistic and payment services it provides to its clients. I think that free cash flow margins, despite significant growth in sales and marketing and research and development costs can rise 300-500 bps/year for the next several years.
The company is led by its founders, a group of Israeli entrepreneurs. The CEO, Amir Schlachel, previously worked at an Israeli bank, Bank Hapoalim where he was Assistant to the CEO. He has also worked as an associate at McKinsey & Co and was the Commander of the Talpiot Air Force Academy. Another of the company’s co=founders, Shahar Tamari is the COO, and also worked at Bank Hapoalim as VP of Business Development. Prior to his tenure at GLBE he was a VP for business operations at an Israeli e-gaming vendor called 888.com.
Obviously the valuation and share price movement of a company like this will be sensitive to market trends. I don’t expect that the shares will strongly outperform when market participants are concerned about the back-up in rates and inflationary pressures. But I have started to acquire a position at around current levels, and expect to continue to add to holding on an opportunistic basis. I think over the course of the coming 12 months the company’s shares will create meaningful positive alpha.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of GLBE either through stock ownership, options, or other derivatives. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (46)
Should I apologize for my recommendation. Short answer no! I am an analyst. I will continue to make recommendations based on the disciplines that I use. We are in the midst of a panic and a massive rerating. I have recently written my views on that subject. Realistically, Global-E the stock won't get better until this panic abates. But forecasting sentiment, which is not logically derived is a fraught undertaking. And I make no forecast whatsoever as to the denouement of the current imbroglio in the Ukraine, and what impact that might or has had on share valuations. But I will keep following Global-E and continue to expect the company will achieve strong growth and a path to strong free cash flow margins.
Regard the "take-rate did actually rise a bit.."Fulfillment revenue were positively affected by increased post-Brexit clearance fees. Due to the new rules related to cross border e-commerce VAT in the EU, which came into force on July 1st, we expect a decrease in both clearance fees revenues and costs, resulting in a slight reduction in take rate, but with an insignificant effect on gross profit going forward.
GLBE is not really quite a SaaS company in that more than half of its revenues are derived from a take rate against GMV. But most of the estimate that this company calls guidance consists of already in-place arrangements that are generating GMV. I suggest you read the conference call transcript and in particular the part where the CFO describes his guidance setting paradigm. If you read that, and consider the comment about high double digit growth, it should be apparent why I do not use consensus estimates which are no more and no less than guidance numbers. I suggest if you did that you would probably find I was a bit conservative in my estimates, as I intended to be.
As to Global-E-it is a recent IPO and doesn't have a lengthy track record. But using the FactSet consensus, or any other consensus to determine what actual earnings and revenues might be simply produces wildly inaccurate results. Right now, the consensus revenue forecast for GLB-E for the quarter that ended last week is for $55 million in revenues, and for EPS of $.01. I was at pains in the article to point out just how unlikely such a result might be.
Finally, just look at the Yahoo Finance consensus for 2022. It shows an EPS estimate of $.20. Now I doubt that such a number is within hailing distance of reality. But there it is.
Again, as I was pains to point out in the article, GLBE management wants to set a bogey of 70% growth in order to have margin to beat investor expectations. There "forecast" does not imply that they believe that the most likely number is the one they present as guidance. Indeed, as I pointed out in the article, the CFO went through the construction of the so-called forecast. If you read the transcript, you will readily see why the number is biased low.
If you want to discuss the business of Global-E, its competitors and its prospects that is great. But to present misinformation and dubious FactSet consensus just wastes lots of electrons.
As it happens, if you but look at the income statement, you will see the company is actually profitable even excluding the impact of stock based comp which was very small. I took pains to point out that the GAAP loss was a function of the non-cash charge for the amortization of the warrant expense. Again, as I wrote in the article, I already use a share count as if the warrants and convertible preferred were exercised and fully converted so it is proper and reasonable to remove the amortization expense. I might add parenthetically, that whether or not you agree with the convention, if you want to invest in the IT space, you will find almost all businesses report non-GAAP earnings. Dubious or not, that ship has long since sailed-today, many companies do report "implied shares," and when that data is available I use it as well to account for SBC.
Short-term, the lock-up period expiring November 8 (as per MarketBeat) may yield a favorable entry. Then again, your above referenced 9/10/21 issuance of a secondary 15.6M shares will have muted that possibility.
