GigaCloud Stock: Consider Buying on This Dip (NASDAQ:GCT)

Update of my thesis

I initiated a relationship GigaCloud Technology (NASDAQ:GCT) stock back in May 2024 with a bullish rating that ended up aging against my plan as the stock started to fall – I was “lucky” to notice that its local peak:

Despite this large drop, I still think GCT stock is a great illustration of how investors can take the opposite approach to consensus, with a risk/reward that is more favorable to them. GCT is becoming even cheaper than it was before. Furthermore, even though revenue growth may slow down a bit, the current EPS consensus still underestimates the company’s true potential in my opinion.

My reasoning

If you haven’t followed the company before, let me give you a brief introduction to GigaCloud Technology Inc. as I did in my previous article. GCT works as a global provider of end-to-end B2B e-commerce solutions, primarily focused on large packaged goods, particularly furniture. Despite having a single reporting segment, GigaCloud’s revenue streams appear to be quite diversified across services, 1P, and off-platform e-commerce, targeting manufacturers, merchants, and consumers in various countries, including Japan, the U.S., Germany, and others. In many ways, the business model the company has developed (management describes GCT as “pioneer in global end-to-end B2B e-commerce solutions for large shipments“), according to IR GCT materials, solves some of the challenges of the classic retail business model based on the provision of products and services:

My previous article on the company was published just after its Q1 2024 report. Since then, GCT has yet to release its Q2 report, which is due in less than two weeks, according to Seeking Alpha.

As of March 31, 2024, GigaCloud’s GMV has skyrocketed to $907.7M (+64.0% YoY growth), representing a 3-year CAGR of >25%. This impressive growth was driven by an increase in the number of active buyers (+29.1% YoY) and higher spend per active buyer (+27.0% YoY). I consider these to be key metrics for any distributor like GCT. Thus, fueled by the expansion of these metrics, the company’s revenue in Q1 FY2024 reached $251.08M, a significant increase of 96.5% YoY. Despite having its main executive offices in the US, the majority of GigaCloud’s employees are based in China and Southeast Asia, which helps keep operating costs lower compared to competitors like Amazon (AMZN) and Alibaba (BABA). This efficiency is reflected in its margins. This oddity helped GCT report an impressive $34.5 million in adjusted EBITDA in Q1 (+74% YoY), with margins declining slightly to 13.74% from 15.76% last year. This reduction seems more like a return to normalcy than a sign of serious trouble. In any case, GCT’s revenue growth amid stable OPEX led to EPS of $0.84, beating consensus estimates by about 29%, according to Seeking Alpha.

I’ve seen a few articles recently that question a company’s revenue growth. One of the most recent articles that has gotten a lot of attention was written in late July here on Seeking Alpha by another analyst at Hunting Value. The author argues that we should focus on organic growth, which can be at least 2x lower than what’s reported in the financial statements (i.e. compared to the headline numbers). Let’s imagine that the entire situation described by the author is accurate. Instead of doubling revenue, the company actually grows it at the level the author suggests, which is around 25-40%. Let’s also assume that this organic growth actually slows down.

In my opinion, this is already reflected in the share price. If we look at the consensus forecasts for the next 3 years, we see a slowdown in the revenue growth rate, even lower than those reported by Hunting Value. I want to emphasize that the slowdown or delay in organic growth compared to overall growth seems to be common knowledge in the market: no one expects the company to continue doubling its revenues, because that would be an overly optimistic assumption. In my opinion, the market has a realistic outlook on GigaCloud’s revenue growth prospects in the coming years. Therefore, I do not see any significant risk on this front.

Furthermore, while the Seeking Alpha Quant Revisions rating has recently declined slightly, I don’t see GCT’s EPS estimates deteriorating significantly going forward. On the contrary, these estimates have increased significantly over the past 3 months:

At the same time, over the past 3 months, the share price has fallen from $37.27 to $25.56, a drop of over 30%. Why is this happening?

To be fair, it should be noted that earnings per share (EPS) estimates for the next 4 quarters have been lowered by 3-6.4% over the past month:

It’s hard to say what prompted these revisions. However, the company has never missed a consensus estimate since going public, and I expect these reductions will only create more favorable conditions for another beat (in Q2, 2024).

Either way, I think the main reason for the recent decline in the stock is the same as in March: renewed concerns and uncertainty about the perception of the company’s business model. I mentioned earlier that the main reason for investor uncertainty about the future of GigaCloud is primarily the arguments in the short seller’s report. Although GigaCloud has initiated an independent review and engaged external experts such as FTI Consulting (FCN) and White & Case LLP (who found the allegations in the report to be unfounded after a thorough review), the reputational risk of the report still hangs over the company, leading to mispricing.

GigaCloud stock is currently trading at just 9x next year’s earnings, while the sector norm is around 16.50x. It’s worth noting that I don’t see any major risks when it comes to debt on the company’s balance sheet, so valuing GCT on a P/E multiple seems like a more reasonable approach to me than on EV/EBITDA, which, by the way, is also below the sector median.

Since Q4 2022, the company has never exceeded consensus EPS expectations. Even if we assume that the current fiscal 2024 EPS guidance is accurate and GigaCloud earns $3/share by the end of 2024, expanding the current multiple to at least 10x earnings would see us priced at $30 per share, which is ~17.4% higher than the current price. And be warned: this is a pretty pessimistic scenario. Given the organic growth, I believe the stock should be trading at a multiple of at least 12x. This in turn gives us a “fair” price target of ~$36/share.

Considering the above, I believe it is worth buying GCT shares due to their large decline.

Risks to consider

First of all, as I noted in my previous article, GigaCloud is a pioneer of a relatively new business model, which makes direct comparisons difficult. So predicting its performance over a longer historical horizon is fraught with uncertainty due to the unpredictable effects of business cycle changes and economic slowdowns. This uncertainty is key to acknowledge.

There’s also a risk that Culper’s allegations, which in this case may not be entirely true, may have some elements of truth. Such revelations could significantly lower the value of the stock, especially given that it has risen so much in recent weeks and months.

In addition, I base my analysis on some fairly risky assumptions about the company’s future development. For example, I assume that the current consensus is too pessimistic; however, there is always the possibility that the market has insights that I am not aware of, or that Wall Street analysts’ estimates are in fact too optimistic. Furthermore, when I say undervalued, I am taking into account market “norms” that may not apply to GCT, whose market capitalization has not exceeded $2 billion to date. It is conceivable that the discount seen in the key share multiples may be justified given the size of the company.

Your food to go

I believe we are dealing with a company whose reputation has suffered because of accusations it has vehemently denied, but I suspect the shadow of those accusations still lingers and unfairly affects GigaCloud valuations.

The company is growing not only in absolute terms but also geographically, expanding its global presence and potential addressable market. At the same time, GCT’s key margins are growing, with no peak in sight at the moment. Even if we base our calculations solely on the company’s organic growth, I think the pace of this growth is still significant enough to avoid disappointment.

In my opinion, it may take a few more quarters for the current valuation discount to reverse. Even assuming that GigaCloud does not receive a valuation premium for its exceptional growth, a logical expansion of the P/E ratio to at least 12x would imply a potential upside of around 41% from the current price. Therefore, I decided to reaffirm my Buy rating on GCT stock, which I believe still has a favorable risk-reward ratio for investors.

Good luck with your investments!