USell: An Unknown ReCommerce Marketplace With An Impressive Growth Story

Summary

• uSell is experiencing rapid growth, as revenue in 2013 increased 125% y/y and devices sold through the platform have increased 80% y/y.

• There is ample supply in the marketplace for uSell to capture. Consumers currently have $25B in electronics inventory to sell, with an additional $12B being added through 2014.

• The smartphone reCommerce marketplace is fragmented. uSell is consolidating this market by providing a service with more competitive advantages than its peers. Its valuation could grow to be $130M.Management owns nearly 30% of the company, aligning their interests with that of shareholders. An uplist to the Nasdaq is a significant and imminent near-term catalyst.

• An 85%+ GM, coupled with high growth and cut costs will lead to EPS of $0.35-$0.40 in 2015. A 25x P/E results in 100%+ upside potential.

Opening:

USell USEL is a US-based reCommerce marketplace that instantly finds cash offers for smartphones and electronics. The company provides a technology platform matching individual sellers with large buyers. It has had a phenomenal 2013, with revenue growth of 125% and improved marketing spend efficiency. The company is targeting a multi-billion dollar market, and has the competitive advantages necessary to successfully capture and profit from this previously fragmented marketplace.

In comparison to other marketplaces, uSell has a smaller market capitalization that will grow more in line with its peers as it continues to execute its business plan. Moreover, $4M of the company's recent raise is slated for marketing that will bolster business activity. With 29.4% insider ownership and an imminent move to the Nasdaq, shares are ripe for the picking. Looking forward, uSell has the potential to earn $0.35 to $0.40 in 2015. With a conservative 25x P/E ratio, this equates to a PPS of $9.08, or 100%+ upside potential.

Expanded Thesis:

uSell Is Experiencing Rapid Growth:

On a revenue basis, uSell's growth has been substantial, up 125% y/y to $5.37M in 2013. This is well above 2012's revenue of $2.38M. For the most recently reported quarter ending March 31, 2014, the company reported an improvement in its operating loss that improved by roughly $0.3M Y/Y from ($1.61)M in the 1Q of 2013 to $(1.28)M in the 1Q of 2014. The recently reported quarter was light, due to uSell implementing an operating change in its business model, which we will detail in this report. Marketing is about to ramp up, however, as the company has nearly $4M slated for marketing that will be discussed in more detail later.

When reviewing uSell's operations, it is clear that the company has seen impressive growth in various areas of its business.

On a monthly basis, the number of unique visitors has been on an upward trend. The amount of unique visitors was up, even as the company pulled back media spending in the first quarter due to a shift in its pricing model. This speaks to the robust nature of uSell's business and the fact that more unique visitors equates to more business for uSell. As more unique visitors reach the company, we will see increased business.

The number of shipping kits requested by individual sellers has been on the rise, especially after the company augmented its business model. Under the new model, buyers pay uSell a commission only when they pay the seller for a received device. uSell then recognizes revenue upon payment to the seller. This system replaces the old model, where the company earned up-front lead fees from buyers when sellers accepted offers on its website, regardless of whether the seller ultimately sent in their devices to the buyers.

The new business model provides a lower risk for buyers, provides buyers with a more competitive device acquisition cost, allows buyers to offer higher prices to sellers, increased conversion rates and throughput and will increase revenues and cash flows for uSell. The below excerpt is taken from uSell's recent 10-Q (linked above), and explains the change in more detail.

“Beginning in February 2014 and for the subsequent six weeks, we phased in a major change to our business model. Under the new model, we eliminated the upfront lead fees to buyers and began charging transactional fees when buyers pay sellers for received devices. Whereas prior to the change, we recognized revenue upon acceptance of an offer and submission of the form on our website, we now recognize revenue upon payment to the seller. This aligns our incentives with sellers and reduces risk for buyers. It also creates a material change in our timing of revenue recognition, as sellers typically receive payment 2-5 weeks after placing orders on the website, depending on when they send in their devices. The impact of the change on our timing of revenue recognition significantly affected our revenues during the three months ended March 31, 2014, and is expected to continue to impact revenues through late April 2014. Additionally, we also experienced a significant impact to our cash flows during the three months ended March 31, 2014 since buyers are now paying uSell after having received the devices from sellers. Notwithstanding the lag in the timing of our revenue recognition and cash flows during this transitional period, we anticipate that revenues for the quarter ended June 30, 2014 will be higher than our revenues for the quarter ended March 31, 2014.

Although we experienced a decrease in revenues during the three months ended March 31, 2014 resulting from the transition in our model, we have seen a dramatic and directly correlated up-tick in several of our marketplace metrics. Most notably, we have seen meaningful increases in prices offered to sellers, conversion rates, and throughput as compared to the three months ended December 31, 2013 and the month of January 2014. Since the change, the average price offered to sellers on our top 100 SKUs has increased by nearly 20%. This increase in pricing has resulted in our conversion rate jumping by more than 100%. As conversion has increased, so has throughput, as measured by Orders Placed on the website. We generated over 45,000 Orders Placed in the month of April, compared to an average of 25,000 Orders Placed per month prior to the shift. We are using Orders Placed as a leading indicator of GMV, since GMV can only be reliably measured on a 5-6 week lag. In the future, GMV will be our primary measure of throughput.”

The full impact of the increase in throughput will not be entirely realized in the short term. We have identified a strong correlation between increases in throughput and organic customer demand in the form of repeat and word of mouth traffic. Growth in these free traffic sources is a key driver of future growth and profitability. Therefore, we anticipate further positive long-term impacts as a result of the change in our business model. (Bolded for emphasis, Source)

The new system has led to an increase in shipping kits requested and adds more credibility to the platform, as sellers must be credible in their listings in terms of the device's condition. If the condition is different than what was originally stated, then the buyer can offer a revised quote before the seller is compensated. This system cuts any reason for a seller to misstate a device's condition, creating a more credible marketplace over peers such as eBay EBAY

.

uSell has also seen a large increase q/q on the number of repeat customers. This speaks to the stickiness in uSell's user base. Repeat customers signify increased business without spending marketing dollars to reach them. The above statistics demonstrate that 2013 was a growth year for uSell's business. Furthermore, 80% more devices were sold through the platform than in the prior year. The above statistics pertaining to the growth repeat customers are very positive for the company's operations. Overall, uSell has been an intermediary for over 200,000 devices.

As shown above, the cost per visitor is on a downtrend due to repeat customers, which signifies uSell's growing efficiency as a business and ability to rein in costs. Decreased costs are also apparent in the company's improved marketing efficiency spending from 109% of revenue in 2012 to 88% of revenue in 2013. Decreased marketing spending and increased user growth as site traffic is up demonstrates uSell's overall growing efficiency as a corporation.

Due to uSell's increased marketing efficiency, if the company were to spend a significant amount of money on marketing, it would enjoy a higher return, due to its increased marketing performance metrics. In the company's recent S-1/A, explained in more detail later, uSell plans to use $4M for marketing purposes. It is my opinion that this large stake set for marketing can increase uSell's top line more than ever before, due to the company's increased marketing efficiency metrics across the board.

uSell Is Targeting A Market With Ample Supply:

The supply side of this equation is breadth with opportunity. Currently, nearly $50 billion-$75 billion of in-home inventory has not been activated, with electronics accounting for $25B of this amount. Moving further into 2014, uSell is projecting that $150M worth of smartphones will be sold in 2014. This number applies to smartphones that consumers will want to resell through a marketplace, not the total number of smartphones sold in 2014. Using the average value per device on uSell of $80, this translates into a $12B opportunity. If the company is able to obtain just a 1% market share, that would equate to a revenue figure of $120M. This is well above 2013's revenue of $5.37M and why we consider our later revenue projections to be conservative in nature. There is not only $25B of supply for uSell to target now, but an additional $12B to capture through 2014.

Another point to consider is that nearly 80% of iPhone sales in the next year could be replacements. This amounts to $110M in 2014 and $130M in 2015 for iPhones alone. With the onslaught of new devices, such as the Samsung SSNLF Galaxy S5 and the Apple AAPL iPhone 6, replacement sales could increase as consumers sell their old phones to buy new devices. This will boost business for uSell's smartphone reCommerce marketplace.

Outside of its own website, uSell has a partnership with Staples SPLS, the second-largest e-retailer, with 27M monthly visitors. This relationship powers online trade-ins through Staples' website to the gain of uSell's top line. This is a massive opportunity for the company, due to Staples' large visitor presence. Furthermore, the model is scalable and can be rolled out to other retailers in the future. It is our opinion that uSell's partnership with Staples will further help the company target the ample supply in the marketplace.

uSell Can Successfully Do Business In The Currently Fragmented Market:

The current state of supply in the smartphone reCommerce industry is fragmented, with many buyers, sellers and exchange mediums. The single most paramount concern is whether or not uSell can navigate the competitive landscape in the smartphone reCommerce industry to capture the enormous available supply. It is my opinion that uSell is in a unique position to triumph over its various competitors.

uSell vs. eBay:

Historically, buyers and sellers used to only meet on eBay, where the condition of items could have differed from what was originally stated. The addition of Power Sellers to the eBay model was positive, although these large sellers are challenged with finding a supply stream that is large enough.

When comparing uSell and eBay, we note that consumers won't have to expend time and energy monitoring an auction, researching potential rates, or dealing with shipping and/or customer assistance on their own. Moreover, there are no quality issues with uSell. Revised quotes are sent to the seller, should there be any question regarding an item's condition when it is received, before any money changes hands. This adds more credibility to uSell's marketplace over eBay's. This is a major advantage over eBay's ship-and-forget system. An additional perk is that with uSell, the seller does not incur eBay's seller fees or PayPal's fees.

uSell deals with large buyers of smartphones, so they can negotiate deals with eBay's PowerSellers for a more robust relationship. This also solves the problem that PowerSellers have finding large sources of supply.

uSell vs. ecoATM:

Next on the list is ecoATM. This company places kiosks in malls, which will buy devices from consumers. The key problems with ecoATM are that the pricing could be subpar and it is a lengthy ordeal -- even requiring a driver's license. Unfortunately, ecoATM also receives a large portion of stolen devices, and many consumers have stated that trying to retrieve them is also an extremely frustrating ordeal. Some consumers have stated that the machines accept the device before alerting you if the machine has enough cash to pay out. If this is not the case, you will have to wait to receive a check in the mail.

uSell triumphs over ecoATM, due to the fact that the company offers quick cash offers for devices. The platform is also not troublesome to use, and is not a lengthy nightmare. uSell's system is fast and extremely easy to use in the face of ecoATM's structure, which is not only long but requires you to leave the house. uSell's exchange can be completed right from your computer, so there is no need to leave your house or risk your devices being stolen on the way. It is worth noting that Outerwall OUTR purchased ecoATM for $350M last year, nearly 17.5X higher than uSell's market capitalization.

uSell vs. Gazelle:

Gazelle is another direct competitor to uSell. The above chart illustrates the platform benefits uSell offers to the consumer, as the company has enjoyed more unique visitors over Gazelle, even with less marketing spending. This demonstrates uSell's superior marketing efficiency over Gazelle. On a deeper level, this proves that consumers deem uSell's platform superior over Gazelle's, as more consumers have used it, despite less marketing reach.

A key advantage that uSell has over Gazelle is the fact that uSell does not incur the costs of taking inventory of the devices. Gazelle has to not only account for the devices and handle shipping and handling out of its warehouses, it incurs all of the costs of warehousing as well.

uSell acts as an intermediary, linking buyers and sellers with their devices faster than ever, without having to incur the costs of taking inventory of the devices. In addition, this intermediary relationship facilitates the process of linking buyers and sellers, cutting down on time significantly.

uSell links sellers with larger buyers, which is more robust than Gazelle's drive to sell to individual consumers. This way, uSell can negotiate agreements for higher quantities and develop stronger business relationships over Gazelle's system. uSell has substantial marketing efficiencies over Gazelle with regard to customer acquisition. This is due to the fact that uSell has over 60 power buyers to offer competitive pricing on various SKUs, whereas Gazelle is the sole buyer from sellers.

Lastly, uSell's system of allowing for revised quotes to be sent from buyers to sellers if the received device's quality differs from the original listing also applies as an marketplace credibility advantage over Gazelle's platform.

uSell vs. Carriers' Programs:

Today, many carriers offer trade-in programs. These programs are not as attractive as uSell's platform, since they only offer gift cards that can take weeks to receive in some cases. These gift cards can only be used at their own stores, such as Verizon VZ. This positions uSell as the medium of choice for consumers who want cash for their old devices.

Other than earning cash for your device instead of a gift card, uSell has better pricing options for consumers. For example, for a 16GB iPhone 5S, Verizon will offer up to $300 for the device. On the other hand, uSell offers $352 for the same device in good condition. USell offers even more money for the device in flawless condition. It is my opinion that the ability to get cash for your device instead of a gift card to your carrier and more money for your device gives uSell a competitive advantage over carriers' trade-in programs.

When walking into a Verizon store, the drive is to sell you a new phone, not question what you are doing with your old phone. As such, trade-in programs through carriers on the retail level are an afterthought, with stores focused mainly on new device sales.

Closing Competitive Thoughts:

Investors' number one concern is whether or not uSell will be able to compete in this fragmented industry to capture the ample supply that is available. USell can as it leverages the buying power of merchants, while also providing a phenomenal customer experience for individual sellers. For example, the company's seller interface is easy to use, with a shipping kit delivered directly to the seller's house in just a few days. Overall, uSell will be successful in the face of its peers, as its competitive advantages will help consolidate a currently fragmented smartphone reCommerce marketplace.

Comparable Businesses Trade At Much Higher Valuations:

As uSell continues to grow and execute its business plan, we believe shares will be valued more closely to the company's larger marketplace competitors. With a small $25M market cap, uSell has plenty of room to grow. Looking at other marketplace success stories provides insight and demonstrates the potential for these businesses to grow. I am comparing USEL to the companies below, as they can provide insight as to how highly the market values competitive and successful marketplaces. The companies below all work to offer a marketplace for different industries, since there are not a plethora of public reCommerce marketplaces for smartphones -- but they can provide valuation insight for successful marketplaces in general.

Looking at these marketplaces, Airbnb has a $10B valuation and Uber has an $18.2B+ valuation. Airbnb is a private company and a travel website, but its financials include revenue of $250M and a market cap close to $10B. This equates to a market capitalization-to-revenue multiple of 40X, which is much higher than uSell's 4.8X multiple at year-end 2013.

A few of these comparisons are an apples and oranges comparison, although there are few direct peers for uSell. The closest comparison to uSell is OpenTable, as it is a technology platform bringing buyers and sellers together, much like uSell's platform. As such, readers should be aware that these are not direct comparisons, but can offer insight to other marketplace peers. Moreover, it speaks to the fact that uSell does not have many direct peers, meaning it is one of the sole direct companies providing a smartphone reCommerce marketplace.

Recently, another deal came across that Priceline would acquire OpenTable for $2.6B, or 11x 2014 revenue and 27x 2014's EV/EBITDA. OpenTable is a pure marketplace, allowing consumers to make restaurant reservations. This steep 11x revenue price is more than double uSell's current 5x figure.

Another competitor, Uber, connects consumers with drivers and taxis. Uber is looking for an $18.2B valuation. Reports were leaked last year stating that the company earned $20M per week in revenue, or just over one billion per year. With an expected $18.2B market cap, this gives it a market cap to revenue multiple of 18.2x, much above uSell's 4.8x ratio.

Amazon AMZN, the largest online marketplace, sports a 487.6X TTM P/E ratio. This is the reason we believe our 25X P/E expectation for uSell in our later projections to be very conservative in nature for a fast-growing company.

Insider Ownership Is An Excellent Sign:

Insider ownership is an excellent indicator that management's interests are aligned with shareholders'. This is especially coveted at the microcap level, where management expertise is the company's biggest asset. uSell's insiders own 29.4% of the shares outstanding. This includes chief financial officer Daniel Brauser's 12.6% stake and chief operations officer Nik Raman's 5.4% stake. Both Mr. Brauser and Mr. Raman are directors of the company as well. In total, all of the company's directors, executives and over 5% shareholders own 90.49% of the company's shares. As such, shares could move higher on positive news, as the supply of shares is small. The recent offering that can improve liquidity in the company's shares mitigates this risk.

Insiders are continuing to demonstrate their confidence in uSell by purchasing shares. On June 17, insiders Michael Brauser, Daniel Brauser and Nik Ramen purchased (I,II,III) a total of 10k shares at prices between $3.48-$3.88. Another insider, Michael Brauser is chairman of the board at uSell. Together with his wife, he owns 499,714 shares that equates to an approximate 6% stake after the recent S-1 closes. Michael Brauser served as a co-chairman of InterCLICK before Yahoo purchased the company for $270M.

uSell's story has also attracted the interest of billionaire, Dr. Phillip Frost, the trustee of Frost Gamma Investments Trust. Back in July 2013, uSell issued a $300k note to this trust in exchange for a $300k investment. Dr. Phillip Frost converted this note into 100k shares of preferred stock at $3 per share.

Overall, uSell has a highly motivated, powerful leadership team, coupled with an impressive set of large and experienced investors.

A proficient management team is one of the most important factors when deciding to invest in a microcap company. Outside of their ownership in the company, Mr. Brauser and Mr. Raman are an extremely capable team. Mr. Brauser has a background in consumer marketing and activating inactive markets. He also founded Health Benefits Direct that was a disruptive insurance marketplace. Mr. Raman is a Harvard Business School graduate who founded EcoSquid while being a finalist in the HBS business plan competition. He developed an innovative marketplace model to reCommerce, much like he is doing at uSell. After meeting with both company executives at the Marcum Microcap Conference, I left knowing that uSell has two extremely capable individuals driving the company forward.

Uplisting Is A Near-Term Catalyst:

uSell's shares currently trade OTC. We believe a move to the Nasdaq could be a substantial near-term catalyst.

On April 15, 2014, uSell filed an S-1 for the public sale of $10,000,000 worth of units of shares and warrants. In its Q1 report, uSell stated the proceeds could be used to meet the Nasdaq's shareholders' equity listing requirement. This is the only requirement holding the company back from uplisting, and the raise mitigated this roadblock. These two filings propose that a move to the Nasdaq is an imminent event, as the only pending requirement has been satisfied.

The move to the Nasdaq would likely boost shares, as this is a superior exchange that is accessible to a larger expanse of investors. This uplist opens the door to a wider array of retail investors, hedge funds and analysts who can research the company's potential. As an aside, the raise will add to liquidity in the company's shares, which are currently held by a small group. Trading on a larger exchange also creates exposure to analysts researching uSell, which then will spur the inflow of investment dollars into the company.

uSell is an extremely under-the-radar company, with virtually no investment coverage. As the company's investment story reaches the desks of analysts, investors' shares could see additional upside. A move to the Nasdaq can perpetuate this rationale through increased company awareness, liquidity and reach.

2015 Projections And Valuation:

USell has had spectacular 125% revenue growth in 2013, along with very high gross margins of 92.4% for the year. Further, uSell had a decrease in the amount of marketing spending to 88% of revenue in 2013 from 109% in 2012. Looking forward to 2014, uSell's growth story will continue, due to its strong competitive advantages in consolidating a fragmented market that is ripe with supply.

uSell has seen impressive organic and return visitor growth, increased marketing spending efficiency and decreased cost per user. We believe this trend will continue in 2014 as the company continues to grow and develop, due to its strong competitive advantages. Management's $4M of the $10M raise slated for marketing will also bolster the top line in the coming quarters. Furthermore, uSell's increased marketing efficiency means this money will be more effective now than ever before.

The company's Q1 is an outlier, but this is due in part to a one-time event, a non-cash expense of $874K as a result of the company's conversion of its Convertible Notes in 2014. This includes the balance of debt issue costs of $9,000. The remaining amount from the February 2014 convertible notes has been recognized as non-cash expenses, therefore not viewed as impacting future earnings. Q1 would have been a bottom line improvement over the previous quarter if it had not been for this event.

uSell's is a high-growth story due to its business performance and successful navigation in a fragmented market, attributed to its strong competitive advantages. With 35% q/q revenue growth in 2014 and 100% y/y to 2015, we believe revenues will surpass $13M in 2015. Further, we view this as a conservative revenue target, as just a 1% market share of 2014's supply alone would result in a $120M revenue figure. This offers a huge potential market and opportunity for uSell to target and capture moving forward.

Looking at uSell's recently filed S-1/A, the company's $10M raise will increase the total amount of outstanding stock to 8,332,149. As such, we have expanded the share count in our projections for the next quarter, as we assume the deal will close before uSell's imminent uplist to the Nasdaq. We also believe a 25X P/E ratio is conservative in the face of uSell's impressive growth and in comparison to other marketplaces, such as Amazon's 487.60x P/E ratio. Further, uSell's attractive GM will rise to levels seen in 2013, due to a more efficient marketing spend moving forward. The company stated that its G&A expense was consistent, and we believe it will remain steady moving forward. With a conservative 25x P/E ratio, uSell's EPS could reach $0.35-$0.40, resulting in 100%+ upside potential.

Other Valuation Methods:

Revisiting Uber and Airbnb, we can value uSell on the same market capitalization-to-revenue metric as an alternative valuation method. As uSell continues to grow, the marketplace will be more ready to give it a higher valuation. Using uSell's current 4.8X market cap-to-revenue ratio of my 2015 revenue estimate, uSell could be worth $130M. This is a conservative estimate, as it accounts for no expansion in uSell's price/revenue ratio.

This is not a generally used valuation method, but does provide for more insight into the company's potential future valuation. Further, since Airbnb and Uber are private companies, this is one of the only valuation metrics that can be used to compare them to uSell. This comparison is worthwhile, as they are marketplace success stories.

Risks:

• Any increased push by carriers with relation to their trade-in programs could be a risk for uSell. We believe this issue is currently mitigated by these companies only offering gift cards to be used at their own stores, whereas uSell offers cash. Further, it is our opinion that uSell offers a greater trade-in value for consumers, such as what was seen in trade-in value comparisons of a 16GB iPhone 5S.

• uSell is a microcap company that offers its own risks that investors should be aware of, such as decreased liquidity. We believe that the company's nano size is mitigated, as the $10M raise will offer more liquidity in the company's shares. Investing in microcaps requires a patient and watchful investment style; as such, I have a 1-2 year timeline.

• The market currently has several key players that can offer strong competition for uSell. This risk is mitigated for two key reasons -- the first being uSell's competitive advantages over each specific competitor, as described earlier. Secondly, the market is large enough for several players to conduct business, as such, uSell only needs a 1% market share to experience significant growth from current levels.

• If uSell's peers are able to close the competitive gap by offering more innovative services, this could hurt uSell. This risk is mitigated by the inherent structure of these competitors and the fact that uSell has numerous advantages over these peers. For example, the fact that ecoATM is a lengthy process and Gazelle's role as an intermediary holding stock and linking individual sellers to buyers. Additionally, USell's structure links individual sellers with larger buyers for better pricing and a more robust relationship.

• Investors should keep in mind that uSell is currently at post-reverse split lows. This is due to uSell's investment story flying way under the radar, as this is the first article on the company, and due to the fact that this investment story will take several quarters to unfold.

• Furthermore, any higher pricing options for customers/intermediaries may challenge uSell's business, such as the risk of an increased push by carriers that was discussed earlier in the risks section.

Conclusion:

With the risks in mind, we believe an investment in uSell has a very favorable risk/reward profile. uSell is an extremely under-the-radar company, whose investment story has gone uncovered, until now. An imminent move to the Nasdaq will make the company more available to investors and analysts.

Due to the company's robust competitive advantages in consolidating a fragmented but large market, uSell can continue its high growth trajectory. With a highly capable management team and strong competitive advantages, uSell's shares could double in the coming year.

Management Interview:

When contacting the management of uSell, it was confirmed that they were interested in taking part in an interview with SecretCaps. Unfortunately, they are unable to due to their current pending registration. While attending the Marcum Microcap Conference, I scheduled a meeting with both Mr. Nik Raman and Mr. Daniel Brauser. I was impressed by their experience, drive and motivation. It is my opinion that they are a highly capable management team -- the most crucial part of microcap investing. An interview with uSell's management team will be sent out to SecretCaps members in the coming weeks.