Global-e Online: A Strong Growth Story With A Bright Future And A Long Runaway

Overview

Global-E Online Ltd GLBE provides end-to-end services for cross-border e-commerce by offering a comprehensive platform for both merchants and consumers.

• For consumers, the platform identifies foreign customers based on their IP address and provides them with a complete local experience. Prices are quoted in local currency, net of taxes, duties, and shipping costs. The platform also offers multiple payment methods and various shipping options, as well as customer support in local languages.
• For merchants, Global-e collects duties and foreign taxes on behalf of the merchant and guarantees no fraud. The platform also provides merchants with data insights from more than 1,000 merchants to help them increase demand and sales conversion rates.

Business Model

Global-e is able to provide its services at a competitive price due to economies of scale. The company has a large network of partners, which allows it to negotiate lower shipping rates and other costs. The same applies to the proprietary software that the company provides. It would not be economical for merchants to build on their own. However, this business model is not well-suited for mega brands that have their own contracts and logistics operations in place. These brands may be able to negotiate better rates and terms on their own, and they may not need the data insights that Global-e provides.

Strategic Partnerships

It would appear that Shopify may be a potential serious competitor. However, the 2 companies have built a strategic partnership and have been working together since Global-e went public. Global-e has the exclusive rights as the third-party provider for end-to-end cross-border solutions on the Shopify platform. Shopify received 20 million warrants at the IPO and currently owns 13.5% of Global-e. The 13.5% stake may be enough to deter Shopify from competing outright with Global-e.

Growth

The company has been growing at a 70-100% year-over-year (YoY) pace for a couple of years. However, that is slowing down. In 2022, revenues grew by 66%, and in the first two quarters of 2023, revenues grew in the 50s. Looking forward, there is still a lot of potential for expansion. The company currently has a little over 1,000 merchants as clients, while there are still many more that can be potential customers. In 2022, Global-e reported a gross merchandise volume (GMV) of $2.45 billion, which is not even 1% of the total addressable market (TAM). Grandview Research estimates that cross-border e-commerce in 2022 was $888 billion and is set to grow at a 25.8% compound annual growth rate (CAGR) to $5.576 trillion by 2030. Geographically, there are still some untapped markets for Global-e. The company has just started to enter the Asia-Pacific (APAC) region. In 2021, APAC accounted for 28% of total cross-border e-commerce and is likely to be the fastest-growing region in the world going forward. This leads us to believe that Global-e may still see a couple of years of growth in the 30s and 40s before it eventually tapers down.

Q2 2023

The company reported another quarter with revenue growth of more than 50% year-over-year (YOY). However, unlike in previous years, Q2 revenue was below Q4 revenue from the previous year. This is likely due to the growth rate slowing from 70% YOY to 50% YOY. Now that revenue has grown in the low 50s in the first half of 2023, it makes sense that revenue will grow at least in the low 40s for the full year. For the second half of the year, the company expects revenue growth to slow to 35% YOY, which would average to low to mid 40s for the full year. However, we should expect revenue to increase in 2024, when the Shopify Markets Pro platform is launched in late 2023.

Profitability

Global-e has always prioritized profitability and has generated free cash flow for several years. The company may have reported a GAAP loss, but this was due to amortizations of acquisitions. The day-to-day operations of the business are profitable when accounting for research and development (R&D) and stock-based compensation. In the most recent quarter, adjusted EBITDA margins were almost 16%, the highest ever for the company.

Margins

Margins have been improving as revenues have increased due to economies of scale. A large portion of the margin improvement is due to a decrease in cost of goods sold (COGS) as the percentage of service revenue has taken a larger portion of total revenue. However, there have also been improvements in operational costs as a percentage of revenue, and this is likely to continue as revenues increase. The record adjusted EBITDA margins that the company delivered in the most recent quarter are likely to improve over the next few years. Management expects adjusted EBITDA margins to be in the low 20s within a few years.

Valuation

We can build a discounted cash flow (DCF) model to value Global-e. We make the following assumptions: The company's revenue growth will continue at 40% or more for the next two years, then taper down to 3% in the long term. Operating costs will continue to decline as a percentage of revenue until adjusted EBITDA margins reach the low 20s. We discount future cash flows at a 12.5% rate (the beta may only be 1.28 but that's because this is a recent IPO, the risk definitely demands a higher premium).

This DCF model values Global-e at $58 per share, which is 60% higher than its current trading price.

We can also value Global-e by assigning a future price-to-earnings (PE) ratio. Based on our assumptions, the company should earn $245 million in net income in 2027. Assuming a generous PE ratio of 50, due to the company’s rapid growth rate, this would value Global-e at $72 per share in 2027 and at $42.5 discounted back to today at a 12.5% discount rate. However, the company is likely to generate $800 million in free cash flow (FCF) by 2027. This FCF could be used to expand operations and increase earnings, or it could be used to repurchase shares and reduce the float by at least 10%. If we assume that the company repurchases 10% of its shares, this would value the shares at $47 per share, which is 25% higher than its current trading price. However, this valuation metric gives us a much lower valuation than our DCF model.

Summary

Global-e is a unique company that provides a valuable service to the cross-border e-commerce market. The company has a strong track record of growth and is well-positioned to continue growing in the years to come. The company still has a lot of growth potential ahead and should continue to grow. Margins will likely improve as revenues increase due to economies of scale.

Conclusion

We believe that Global-e will continue to grow and create value for investors. We also believe that the shares are currently undervalued and that they should be trading higher. We will be closely monitoring the company's expansion into Asia, as we believe that this market presents a great long-term opportunity.

This content is for informational purposes only and is not intended to be investing advice.