GigaCloud Technology Inc. (NASDAQ:GCT) is a $406-million market cap company that offers comprehensive B2B e-commerce solutions for large parcel goods. Their marketplace links manufacturers in Asia with resellers in the US, Asia, and Europe, facilitating cross-border transactions for items like furniture, home appliances, and fitness equipment.
Their platform offers a seamless end-to-end experience that includes discovery, payments, and logistics solutions. GCT’s global reach fosters a cohesive ecosystem that empowers Marketplace users to create endless opportunities and explore new businesses. In addition to its marketplace, GCT also offers a nationwide flat-rate fulfillment service powered by cutting-edge AI, machine learning, and state-of-the-art technology.
In Q2 FY2023, GigaCloud reported total revenues of $153.1 million, up 23.5% from Q2 2022. This increase was driven by greater demand for large parcel merchandise, resulting in revenue growth across their 3P services, 1P products, and off-platform e-commerce channels. Costs of goods sold increased by just 5.4%, so the gross profit went up by 137.1%, leading to a margin expansion of ~1,270 tremendous basis points YoY (26.4% vs. 13.7%).
As a result, GCT’s EBIT increased by 184.2% YoY. Net income for Q2 was $18.4 million, a significant 202% year-over-year increase. GCT’s EPS tripled compared to last year ($0.45 vs. $0.15 per share).
Source: GCT’s IR materials for Q2
In terms of cash flow, in 1H FY2023 the company generated $38.6 million in net cash from operating activities, a significant improvement compared to a net cash outflow of $10.3 million in the same period in FY2022. This positive change is primarily due to the rise in net income and slower inventory growth:
At the same time, the company’s balance sheet looks more than stable with $181.5 million in cash and $0.9 million in restricted cash, up from $143.5 million and $1.5 million, respectively, last quarter. GCT has virtually no debt – most of the liabilities relate to operating leases:
If we take the company’s operating liabilities instead of debt and modify the classic debt-to-equity ratio, we still get a very low indicator that confirms the strength of the balance sheet:
The company’s liquidity requirements also appear to be secure, as the current and quick ratios are both well above 1.
According to the IR materials, the GigaCloud Marketplace is experiencing robust growth, with active buyers consistently increasing their spending since its inception. Notably, buyers who joined in 2022 have significantly boosted their spending from $34 million in Q1 FY2023 to $43 million in Q2 FY2023, marking a substantial 26.5% QoQ increase. This upward trend is expected to continue, driven by the expansion of service offerings, logistics improvements, and the anticipation of further growth in active buyers through customer referrals and word-of-mouth recommendations.
For some, the company’s results seem too good to be true.
On September 28, Culper Research, a well-known short seller with a large following of ~22,000 people on Twitter/X, published its research questioning the veracity of GCT’s financial reports. Based on its own data, Culper Research found that the company’s actual warehouse utilization is significantly lower than that of major competitors and that therefore the company’s actual revenue is likely much lower than reported in its 6-K filings. In addition, the short seller doubts the quality of the management team and calls the company’s statements about “AI” unlikely because GCT did not even have a software development line in its financial statements at the time GCT’s management began talking about the use of AI.
While the difference in load levels of GCT and Amazon (AMZN), FedEx (FDX), United Parcel Service (UPS) et al. may be explained with different scales and business models – GCT works mainly in B2B and with certain types of products – then I really have questions about “AI”. How could the company achieve its current efficiency if it had no R&D spending at all last year?
The declared range of AI-powered capabilities looks pretty impressive and, in my opinion, is likely to entail high R&D costs that didn’t exist before, and at the time of Q2 FY2023, they amounted to only $0.5 million.
GCT representatives quickly stated that Culper’s findings were misleading and represented a fundamental misunderstanding of the company’s business model. I do not presume to judge who is right, Culper Research or GCT, because I am not the SEC, but the very fact that there are some inconsistencies makes GCT a pretty risky investment in my opinion.
The phenomenally rapid growth of the company over the last few quarters has caused its valuation multiples to shrink very sharply. Despite the stock’s growth over the past year, forwarding P/E and EV/EBITDA multiples are currently 5.8x and 3.82x, respectively, which are critically low in absolute terms and 58% and 57% below the medians in the Consumer Discretionary sector, according to Seeking Alpha’s Quant System.
For the third quarter of 2023, GigaCloud anticipates total revenues in the range of $162 million to $167 million, reflecting a substantial gain of about 28.5% over the previous year.
If the company manages to translate this growth to EBITDA (imagine no operating leverage to adhere to the principle of conservatism), then TTM EBITDA will be close to $90 million next quarter. Assuming Culper Research’s findings are incorrect, today’s implied EV/EBITDA discount should be greatly reduced. I assume that EV/EBITDA could be 6x in this case – leading to an enterprise value of GCT of ~$528M. Taking into account net debt of -$48.3M (where debt is lease obligations), this results in an equity value of ~$576.2M, which is 41.8% higher than today’s value.
But here it is important to understand that this conclusion about underestimation is reasonable only on the assumption that GCT conducts its business as it reports on it.
The Bottom Line
As with many small caps, GCT has many risk factors that any potential investor should keep in mind.
Market volatility, competitive pressures, and supply chain disruptions can cause stock price fluctuations. Because the company relies on shipping large and bulky goods, it is exposed to potential cost fluctuations in the logistics industry. Regulatory changes may impact the firm’s operations and financial performance while implementing its expansion and diversification strategies is subject to operational risks. Economic downturns, technological threats, and international expansion risks further complicate the investment landscape.
But in addition to these general risks, GCT has a much higher risk factor that needs to be clarified soon to determine the stock’s future performance. I hope GCT shareholders don’t get burned and we find out very soon who was right. But for me personally, even 40%+ growth potential in a pessimistic scenario (after all, I assumed no operating leverage when calculating Q3 EBITDA) cannot be a sufficient basis for a “Buy” rating.
So I’m Neutral on GCT stock.
Thanks for reading!