Technology stock

Is it too late to buy GigaCloud tech stock?

GigaCloud Technology (GCT -13.75%) has taken investors on a wild ride since its August 18 IPO. The Chinese e-commerce solutions company went public at $12.25, started trading at $19.20 and closed at $15.69 on day one. But the next day it shot up to $60 and closed at $48.01.

These post-IPO gains were staggering. But is GigaCloud becoming another meme store like Digital AMTD (HKD 8.82%), the Hong Kong-based fintech that saw its stock inexplicably soar from $7.80 to over $2,500 after its IPO last month? Or is GigaCloud’s recent rally actually sustainable?

Image source: Getty Images.

What does GigaCloud do?

GigaCloud brings together discovery, payment and logistics services in an end-to-end marketplace. It fulfills orders for “bulk goods” like furniture, appliances and fitness equipment.

Its marketplace is a B2B (business-to-business) platform that connects product manufacturers (mainly located in Asia) with resellers in other regions. Management says product makers view its market as an “essential sales channel” that helps them “transact without borders.”

GigaCloud operates 21 warehouses in four countries in North America, Europe and Asia. This scale allows it to ship most of its large packages at rates below fedex Where United Parcel Service.

GigaCloud’s platform streamlines cross-border sales between manufacturers and sellers, so it ideally shouldn’t support its own inventory. But for now, it still manages a lot of its own inventory and then resells it to resellers like Amazon, walmartand Wayfair through its proprietary marketplace. It generated 78% of its revenue from this low-margin proprietary market last year, but it expects that percentage to decline in the future as it connects more manufacturers directly to overseas sellers.

GigaCloud is based in Hong Kong, but it actually generates most of its revenue in the United States. He doesn’t expect to be targeted by Chinese regulators because he doesn’t operate in a “sensitive” industry, and he plans to switch from his Chinese auditor to an American one to avoid potential reimbursement.

How fast is GigaCloud’s business growing?

GigaCloud’s growth in gross merchandise volume (GMV), active third-party sellers, active buyers, and spend per active buyer all slowed significantly over the past year:

Metric

2020

Growth (YOY)

2021

Growth (YOY)

Gross volume of goods

$190.5 million

437%

$414.2 million

117%

Active third-party sellers

210

196%

382

82%

Active buyers

1,689

283%

3,566

111%

Spend per active buyer

$112,777

40%

$116,150

3%

Data source: GigaCloud F-1 filing with the Securities and Exchange Commission. YOY = year after year.

The company attributed the slowdown to tough year-over-year comparisons with the pandemic, which had temporarily boosted home furnishings sales as more people stayed indoors. The slowdown was also exacerbated by supply chain constraints and disruptions. As a result, revenue growth slowed, gross margins contracted, and operating and net profits declined:

Metric

2020

Growth (YOY)

2021

Growth (YOY)

Revenue

$275.5 million

125%

$414.2 million

50%

Gross margin

27.3%

N / A

21.6%

N / A

Operating result

$44.2 million

820%

$39.4 million

(11%)

Net revenue

$37.5 million

1,211%

$29.3 million

(22%)

Data source: GigaCloud F-1 filing with the Securities and Exchange Commission. YOY = year after year.

Was GigaCloud’s post-IPO rally justified?

At its IPO price, GigaCloud was valued at $493 million. But since the stock nearly quadrupled to $48 a share, market capitalization has swelled to nearly $2 billion, five times last year’s sales.

It would still be a reasonable price-to-sales ratio if GigaCloud could maintain a 30-50% annual growth rate with stable margins. But in the first quarter of 2022, its revenue was only up 19% year-over-year, as rising freight costs reduced its gross margin to just 15%.

If this slowdown continues, GigaCloud could find itself in the same boat as Baozun (BZUN -0.24%), another end-to-end e-commerce solution provider in China that primarily helps overseas brands reach Chinese consumers. Analysts expect Baozun’s revenue to rise just 7% this year and its shares to trade less than once that estimate after falling 80% over the past two years.

Is it too late to buy GigaCloud shares?

Unlike AMTD Digital, GigaCloud actually operates a stable business model with irons in the fire. It is also backed by the Chinese e-commerce giant JD.com (JD 1.13%)who owns 12% of the company.

However, GigaCloud’s stock clearly outpaced its business, which remains heavily exposed to high freight costs, supply chain constraints and trade tensions between the United States and China. Simply put, its post-IPO rally was unwarranted and it’s too late to chase that high-flying title.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Leo Sun holds positions at Amazon. The Motley Fool holds positions and recommends Amazon, Baozun, FedEx, JD.com and Walmart. The Motley Fool recommends Wayfair. The Motley Fool has a disclosure policy.