#1 Jan 24, '24: Gigacloud

Growing & profitable small cap, tapping into the cross-border ecommerce tailwind.

Gigacloud (Nasdaq: GCT) specializes in cross-border ecommerce and logistics for furniture and large goods. Though listed and technically based in the US, most of its workforce - and products it retails - are based in China.

The company’s main claim to fame, and a key source of its competitive advantage, is that it is exceedingly good at moving around large goods, such as furniture, at very competitive rates, across the world.

Its businesses grew around this core competency, and can be seen in three related segments:

• Logistics / B2B 3P. GCT’s original focus, cross-border logistics solutions, traces its roots to in Japan in 2010. This segment has been subsumed into the B2B platform, Gigab2b, as third-party services. Flexport is a rough approximation.

• B2B 1P. Its primary business currently, started in 2019, whose fortuitous timing partially enabled the company’s listing. This segment is similar to Alibaba’s original B2B marketplace.

• B2C sales. GCT also runs storefronts on various platforms, selling its Merax-branded goods on Amazon, Walmart, Wayfair and even on the newer cross-border platforms such as Temu. This part of the business is somewhat similar to Wayfair, although Gigacloud does not run its own platform.

GCT’s biggest market is the US, though it also serves Germany and the UK, the top three furniture import markets, as well as Japan and Canada, who were #6 & #7 in 2021.

Download links

• Excel model: Three-statement model

• Slide deck: Full deep-dive analysis deck

• Word writeup: 20-page document

A China shop in a bull … then bear market

Lifted by QE and the sudden jump in digital business due to the pandemic, GCT enjoyed an excellent 2021, seeing revenue growth of over 80% YoY.

The momentum helped it to float in Aug 2022, and saw a near-quadrupling of GCT’s listing price, before crashing down.

In contrast to the eye-catching antics of its share price, by serving mostly business and corporate clients, GCT has mostly stayed under the radar for consumers.

However, Gigacloud is actually one of the top players in its sector, and quite likely one of the top-100 importers to the US by volume, by our estimates perhaps between 20-30k TEU (Twenty-foot-Equivalent Units).

This affords GCT strong bargaining power over both freight providers and OEMs, as well as economies of scale.

The US furniture industry is much more fragmented than some other consumer goods, in no small part due to the costs of transportation, which makes the business more difficult to scale. Many of the players are relatively small and not listed.

Due to its core competency, and ability to tap into low-cost, high-value manufacturers in China, GCT is well-placed to take market share through its competitively priced offerings, especially competing against smaller companies.

Given the tailwind from cross-border ecommerce and declining production costs in China, GCT is set to benefit from structural advantages for years to come.

While its earnings in 2022 were affected by exorbitant shipping costs, costs for both shipping and truck freight have declined since.

Our estimated TAM for the US furniture market alone would be $5-10 Bn, which implies still quite some headroom for GCT, whose sales we expect to exceed $600 Mn this year.

Recent events

In September 2023, a short seller report resulted in considerable short interest in GCT. Incidentally, when we first decided on GCT as the topic of an in-depth study, its price was below $10 due to this.

Short sellers, however, were caught in a squeeze, and while GCT’s subsequent run-up to $20 in a month has reduced the margin of safety, it still appears significantly undervalued relative to growth.

Borne by the considerable tailwind, GCT grew at over 25% YoY for the first three quarters. Meanwhile the implied growth in the market price is close to 0%.

Given its strong cash generation and more-than-fair valuation - at below 14× TTM PE it is more cheaply valued than even traditional logistics companies like Expeditor (~18.8×) & ArcBest (~16×). These are more capital-intensive and do not grow as fast.

The pledge, the turn & the prestige

GCT has emphasized its B2B platform and AI capabilities in its investor presentations, possibly preferring to downplay its true strengths.

However, its B2B sales are largely 1P sales and not 3P marketplace. In fact, we would be concerned if it were the latter: the dropshipping model as highlighted by GCT has significant scalability issues, and large vendors do not tend to employ this model for large goods.

Indeed, the B2B marketplace itself has scalability challenges. For larger buyers, the Alibaba platform became a way of identifying potential suppliers, rather than where they would place orders - which would often occur off-platform.

Nor does GCT have stand-out AI capabilities. At IPO fewer than 5% of its staff had advanced degrees. Inspecting the source code of its website, GCT appears to have outsourced the web chat to a third-party vendor.

Instead, GCT’s strengths stem from its core competencies, scale & cost advantages. It will have lower production costs than US-based competition, and lower freight costs than fellow cross-border rivals.

Its two recent acquisitions are also noteworthy and indicate savvy management.

When acquiring Noble House, GCT management highlighted the additional warehousing space and B2B capabilities it brought, though Noble House’s assets included a stable of consumer brands and D2C ecommerce websites, which would provide a boost to GCT’s B2C business.

GCT acquired Noble House’s assets as the company filed for Chapter 11 bankruptcy. This implies a discount, especially as remaining inventory constituted a significant portion of the assets.

For reference, Noble House’s creditor provided asset-based lending facility of $110 Mn. This could mean that Noble House acquired $140-200 Mn (depending on the advance rate required by the lender) in assets acquired for just ~$90 Mn, depending on the treatment of trade payables owed by Noble House.

In a similar vein, the acquisition of Wondersign brought to GCT an informational edge: Wondersign provides product, pricing and inventory software to home furnishings brands (we spotted at least 57 logos on their website, including Ashley and Furniture of America) and retailers.

The software keeps product information in catalogs, websites and stores in-sync. Acquiring the company therefore gives GCT the full market intelligence of which products are selling well or out of stock, how they are priced and where they are sold.

We trust this information to be useful to both the B2B and B2C business.

Gigacloud paid $10 Mn in cash for Wondersign.

Thesis

•Solid fundamentals. Growing (mgmt. claimed 50% organic YoY growth for Q4, but declined to provide details) & profitable business with little debt and good cashflow generation, valued at only 13.5X TTM P/E

•Strong network effects. Initial relationships with logistics ecosystem, now building network across growing number of furniture sellers (740+) and buyers (4600+) on B2B platform – first mover advantages difficult to replicate

•Major player in fragmented market. Bargaining power due to scale (GCT revenues form ~2% of annual China-US furniture import value) for both procurement of logistics & goods, resulting in an advantageous cost structure

•Favorable supply side macros. Reduced logistics costs versus pandemic era (despite Red Sea challenges) & deflationary environment in China reducing production costs both promote longer-term pricing advantage versus domestic (US-based) alternatives

Catalysts

•Q4 results. Release of Q4 results especially after 2 acquisitions, and shift to domestic US reporting (uptick in investor sentiment)

•Hidden assets. Acquisition of Noble House from bankruptcy & B2C business are hidden assets; B2C often can represent a 3X markup vs B2B business, so significantly higher margin, though GCT needs to be careful not to alienate current business customers by moving too forcefully

•Noble House. Acquisition of Wondersign for only $10 Mn gives omnichannel inventory & pricing data to GCT – potentially a lasting source of competitive advantage, including for expansion in B2C business, if it can hang on to existing customers

•Legal results. Resolution of Noble House bankruptcy results, and to a lesser extent, resolution of potential lawsuit from investors who suffered losses in GCT shares

Full disclosure: We hold a long position in GCT. We have no business relationship whose stock is mentioned in this note, and are not paid to write this piece (other than paying fellow exponents of the research).

Disclaimer: This should not be construed as investment advice. Please do your own research or consult an independent financial advisor. Alpha Exponent is not a licensed investment advisor; any assertions in these articles are the opinions of the contributors

Edit: Added the word writeup link