BigCommerce: Time To Step Into The Rubble

May 18, 2022 6:09 PM ETBigCommerce Holdings, Inc. (BIGC)3 Comments1 Like

Summary

  • Shares of BigCommerce have slipped more than 50% year to date and are down nearly 80% from all-time highs.
  • This fast-growing e-commerce software vendor is still growing revenue north of >40% y/y.
  • Diversified revenue streams, especially from third-party integrations and products, will continue to support BigCommerce's growth alongside secular e-commerce tailwinds.
  • The stock is trading at a very attractive ~4.5x forward revenue multiple.
  • Looking for a helping hand in the market? Members of Daily Tech Download get exclusive ideas and guidance to navigate any climate. Learn More »
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When the general public is running for the door, smart investors have an opportunity to patiently buy discarded stocks at a huge discount. Such is the case right now with BigCommerce (NASDAQ:BIGC), a fast-growing e-commerce software platform that competes against its much better-known rival, Shopify (SHOP).

BigCommerce hasn't seen any major fundamental degradation this year, but its stock has nevertheless been the victim of severe aversion to growth and tech. Year to date, shares of BigCommerce have seen a nearly vertical line downward, shedding more than 50% of their value. And relative to highs above $70 notched last summer, BigCommerce stock is down nearly 80%.

While I can't argue that BigCommerce was heavily caught up in post-pandemic enthusiasm for consumer internet/e-commerce stocks in the expectation that pandemic tailwinds would last essentially forever, and that BigCommerce was certainly in need of a correction, as usual I think investors took the downside momentum too far. We now have an excellent opportunity to take a step back from the near-term noise, assess BigCommerce's prospects rationally, and build up a well-timed stake in this name.

Chart
Data by YCharts

I retain my strong buy recommendation on BigCommerce. I view BigCommerce as a company that already has strong customer traction, is continuing to work on expanding its product portfolio, and has high gross margins allowing for profit scaling in the future.

The snapshot below, taken from BigCommerce's most recent Q1 investor presentation, showcases how the company isn't only benefiting from secular tailwinds into e-commerce/software platforms that enable online merchants to thrive, but is also intentionally increasing its monetization streams. Over time, the company wants to grow Feedonomics (an e-commerce optimization platform BigCommerce acquired last year for $145 million) as well as other first and third-party ecosystem products to over 20% of revenue:

BigCommerce revenue diversification

BigCommerce revenue diversification (BigCommerce Q1 earnings deck)

Here's a full rundown of what I consider to be the bullish thesis for BigCommerce:

  • E-commerce is a massive market opportunity. This hardly needs to be said: BigCommerce expects global e-commerce spend to reach ~$7.4 trillion by 2025, up from $4.9 trillion in the current year. Of that, merchants' spending on software platforms like BigCommerce is expected to hit $9.9 billion by 2025. In other words, BigCommerce has barely scratched the surface of this opportunity.
  • Tilt toward enterprise. More and more of BigCommerce's business these days is not coming from small individual sellers (though it does help set up storefronts for these retail users as well), but from enterprise goliaths. Enterprise makes up $189 million, or 67%, of BigCommerce's current ARR. Global enterprise clients and well-known brands in the BigCommerce fold include Vodafone, Mazda, Reebok, Sharp Electronics and Johnnie Walker.
  • Multiple routes to monetization. Like Shopify, BigCommerce's main revenue streams come from sellers' subscription fees and transaction fees, but the company also stands to gain greater wallet share by doubling down on ad/product placements, shipping services, payment processing, and other seller services.
  • Profit potential. 2022 is an investment year for BigCommerce, so we won't see much margin leverage this year. However, the company's mid-70s gross margins and its ability to generate single-digit operating loss margins in the past bodes well for BigCommerce's ability to scale profitably.

BigCommerce's valuation has also never looked more modest. At current share prices near $17, BigCommerce trades at a market cap of $1.3 billion. After we net off the $376.1 million of cash and $336.0 million of debt on BigCommerce's most recent balance sheet, the company's resulting enterprise value is just $1.26 billion.

Meanwhile, for the current fiscal year, BigCommerce has guided to $277.8-$286.6 million of revenue, representing 26-30% y/y growth (and higher than an initial outlook of 24-29% y/y growth).

BigCommerce FY22 outlook

BigCommerce FY22 outlook (BigCommerce Q1 earnings deck)

Against the midpoint of this revenue estimate, BigCommerce trades at just 4.4x EV/FY22 revenue - which is quite a bargain for a software company with mid-70s gross margins currently still growing north of >40% y/y.

Again, I believe BigCommerce to be caught in a temporary dislocation between share price and fundamentals. Savvy investors can take advantage of the market's current fear to build up a long-term stake at a substantial discount.

Q1 download

Let's now go through BigCommerce's most recent quarterly results in greater detail. The Q1 earnings summary is shown below:

BigCommerce Q1 results

BigCommerce Q1 results (BigCommerce Q1 earnings deck)

BigCommerce's revenue in Q1 grew 42% y/y to $66.1 million, beating Wall Street's expectations of $63.8 million (+37% y/y) by a strong five-point margin. Likewise, the company continued to build up its ARR base, which reached $280 million in Q1 (67% of which accrues to enterprise customers), up 43% y/y.

BigCommerce ARR growth

BigCommerce ARR growth (BigCommerce Q1 earnings deck)

One note here is that the company does expect ARR growth to moderate from here on out. BigCommerce is now lapping the peak periods of the pandemic, and so e-commerce merchants expecting lower GMV growth will scale back on platform upgrades and software investments. That being said, these dynamics have been baked into the company's 26-30% y/y revenue growth projection for the year.

The company does expects more growth contribution to come from integrations and its platform-as-a-service offering, allowing third-party developers to sell applications that enhance BigCommerce. Per CEO Brent Bellm's prepared remarks on the Q1 earnings call:

Last quarter, we formally introduced a new pillar to our growth strategy, Commerce-as-a-Service. Commerce-as-a-Service enables partners to create and sell customized commerce solutions powered by our platform technology. This announcement has been well received in our partner community.

In Q1, we enabled five new reseller partnerships, including Clover, a leading North American point-of-sale and business management solution owned by Fiserv. Overseas, we launched Fridom, Local.fr, Valuecom/Pay, and Avasam. These partnerships expand our reach to new merchants through the sales and marketing efforts of established category-specific technology solution providers.

This gives BigCommerce the opportunity to onboard new merchants with marginal cost to us, thereby building additional distribution and a flywheel to scale our revenue model profitably. While we are still in the early phase of Commerce-as-a-Service as a strategic pillar for our company, we are pleased that it has already generated three of the largest recurring revenue deals in BigCommerce's history."

The black eye in the quarter: pro forma operating margins in Q1 did fall to -19%, substantially worse than -7% in the year-ago Q1.

BigCommerce operating margins

BigCommerce operating margins (BigCommerce Q1 earnings deck)

A number of factors were at play here. First, pro forma gross margins fell back five points to 75%, driven by investments in hosting infrastructure. Second, sales and marketing expenses as a percentage of revenue ticked up by four points to 45%, driven by a return in travel costs and a catch-up in sales headcount relative to last year. In addition, increased engineering headcount and boosted operating expenses related to BigCommerce's international expansion drove a cost uptick as well.

However, given BigCommerce's current >40% y/y revenue growth on top of mid-70s pro forma gross margins, I'd say there's little reason to fret about BigCommerce's profit margins now - its ability to capture economies of scale as it grows should be secure.

Key takeaways

When we dislodge ourselves from the short-term noise, we continue to see BigCommerce as a mission-critical software platform addressing a huge and growing e-commerce opportunity. International expansion and increased products/monetization are key growth catalysts for BigCommerce going forward. Stay long here.

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This article was written by

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With combined experience of covering technology companies on Wall Street and working in Silicon Valley, and serving as an outside adviser to several seed-round startups, Gary Alexander has exposure to many of the themes shaping the industry today. He has been a regular contributor on Seeking Alpha since 2017. He has been quoted in many web publications and his articles are syndicated to company pages in popular trading apps like Robinhood.
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Disclosure: I/we have a beneficial long position in the shares of BIGC 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.

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