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Introduction
I had been considering buying GigaCloud Technology (NASDAQ:GCT) stock for a while and awaiting a pullback. Fortunately, yesterday's short report from Grizzly Research provided me with such an opportunity, as the stock dipped by double digits during trading hours. In my analysis, I reveal several fundamental strengths of GCT and explain why I prefer to ignore Grizzly's report. I find the valuation very attractive, and I am inclined to give GCT a Strong Buy rating.
Fundamental analysis
According to GigaCloud's annual report, the company is a pioneer of global end-to-end B2B ecommerce solutions for large parcel merchandise. The company's B2B ecommerce platform, the marketplace, integrates everything from product discovery to payments to logistics tools into one easy-to-use platform.
GCT's December 2023 presentation
GCT disrupts the current model by offering an end-to-end solution fully managed by the company. This eliminates unnecessary intermediaries in the supply chain, which decreases the price for end customers.
By handling the entire order fulfillment process from the factory to the end customer, GCT not only helps to drive prices for end customers down, but also enhances efficiency. GCT, a good choice because fewer focal points in any process benefit both factories and end customers.
Therefore, I am not surprised that this disruptive approach helps GCT to demonstrate staggering revenue growth and profitability improvement. Over the last three years, quarterly YoY revenue growth averaged 38%. Over the last three years, the operating margin expanded from around zero to 16.5% in Q1 2024.
GCT has a healthy balance sheet with solid liquidity as of March 31, 2024. According to the latest 10-Q form, the company had substantial $470 million in operating lease liabilities. However, out of this amount, only $61 million matures by the end of FY 2024. Since the company's revenue is growing rapidly and operating leverage improves, meeting GCT's long-term operating lease liabilities does not look challenging.
GCT's Q1 10-Q report
The company's growth is backed by leveraging cutting edge artificial intelligence ('AI) powered analytical tools. GCT's software helps in decision-making optimization across various directions of interacting with customers: product data, warehousing, purchase behavior, and merchants' profiles. Keeping an innovative approach is crucial to being the most efficient player in the game, and GCT looks well-prepared from this perspective.
GCT's December 2023 presentation
According to Precedence Research, the global B2B ecommerce market is projected to grow with an 18.5% CAGR from 2023 to 2032. This is a solid force which will likely help GCT to demonstrate robust revenue CAGR over the next nine years.
Precedence Research
To summarize, GCT is an innovative player who offers the B2B ecommerce market a disruptive approach which eliminates unnecessary intermediaries in the supply chain. The approach appears to be quite popular for GCT's customers as the company demonstrated a 38% revenue CAGR over the last three years and the operating leverage improves as the business scale expands. The industry is thriving, and GCT's clean balance sheet positions it well to continue capitalizing on positive industry trends.
Why do I prefer to ignore Grizzly's report?
Despite the market reacting to Grizzly Research's report with a sell-off and the stock dipped by more than 10% during one trading day, I tend to ignore this noise.
Grizzly Research's reputation is far from being flawless. In its bearish report about Celsius Holdings (CELH), Grizzly's analysts mentioned various reasons why CELH is an apparent sell and there even were allegations in the report that "Celsius and its key insiders exhibit a pattern that shows they are willing to conduct fraudulent activities to boost sales and defraud investors". The report was published on October 9, 2020, when the stock price was around $7.5. CELH currently trades at around $94 per share, meaning that the stock grew by more than 12 times since Grizzly's report.
SA
Last September, Chinese ecommerce giant PDD Holdings (PDD) also became Grizzly's target. Analysts of Grizzly Research called PDD a "Dying Fraudulent Company" and the company's financials as "notoriously unreliable". A couple of months after Grizzly's report on PDD, this company overtook Alibaba's (BABA) crown as the most valuable Chinese e-commerce company. Isn't it too much for a "Dying Fraudulent Company"? Moreover, myself and my friends all had experience of using Pinduoduo, and it is definitely a real company.
There were also a few other examples when Grizzly's aggressive short reports did not age well. The style of these reports appears to be one-sided, with no real evidence to support the claims made. Grizzly Research's reports are available free of charge on its website, which is unlikely to bring notable monetization. This raises questions about the true intentions behind a team of (highly likely) experienced and well-paid analysts producing such reports.
Valuation analysis
For a company demonstrating a 38% revenue CAGR over the last three years, GCT's P/E ratio looks ridiculous. I call it ridiculous because the current P/E is around 13, and it is expected to drop 50% within the next three years. The projected by consensus EPS growth is aggressive, but not something unrealistic given GCT's strong operating leverage.
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My valuation analysis will be incomplete without a discounted cash flow ('DCF') analysis. Since there is almost no financial debt on the face of GCT's balance sheet, I am using the cost of equity as a discount rate for future cash flows. While usually, I rely on FinBox's discount rate estimates, it is not available for GCT. Therefore, I am inclined to calculate it myself using the capital asset pricing model ('CAPM'). The formula is straightforward, and I need the following variables: 10-year Treasuries yield (risk-free rate), U.S. equity risk premium, and GCT's market beta. All these are easily available on the internet, so calculating GCT's cost of equity is not hard. Incorporating the below three variables into the CAPM formula gives me GCT's cost of equity at 9.7%.
Compiled by the author
So, GCT's future cash flows will be discounted using a 9.7% discount rate. I give GCT's DCF model a 3% constant growth rate, slightly ahead of historical inflation rates. An 18.5% revenue CAGR is applied for 2024-2028. Base year revenue is $1.13 billion, obtained from consensus estimates. GCT's TTM levered FCF margin is 4%. Since revenue is poised to grow at a solid pace, it is highly likely that GCT will continue demonstrating operating leverage, which will have a beneficial effect on the FCF margin. Pricing in a 100 basis points yearly expansion looks fair, in my opinion. According to Seeking Alpha, there are 41 million GCT shares outstanding.
Calculated by the author
The fair share price is almost $45, around 50% higher than the current share price. I find the upside potential quite compelling.
Mitigating factors
Yesterday's bearish report from Grizzly Research was not the first one. In September 2023 there was another short report from Culper Research. I do not want to discuss this report in detail or check Culper's track record like I did for Grizzly's Research. The best answer to Culper's hostile report is that GCT's stock price has tripled since September 2023. However, GCT's substantial gains in recent quarters seem to be troubling, and we can see more attacks from other research firms leading to selloffs like the one we saw yesterday.
Beyond the hostile reports, there are also significant risks specific to business. As an ecommerce company leveraging advanced technologies, GCT faces substantial technological reliability and cybersecurity risks. The company's public image depends on the quality of goods sold by third-party sellers, meaning that stringent quality control of new sellers is required. The overall global macroeconomic uncertainty is also a significant risk for GCT.
Conclusion
Yesterday's dip in GCT after Grizzly's evidence-lacking report appears to be an excellent opportunity to buy the stock. The company's fundamentals are strong, continuously improving, and the valuation is compelling.
