GigaCloud Technology Inc. (NASDAQ:GCT) stock is getting crushed today following just-reported Q2 earnings. Despite the impressive growth rate, as well as a really attractive valuation for this growth, the stock just cannot catch a bid. This comes as we have had a one-year target of $60 on the stock, assuming a market multiple commensurate with your average stock, provided the growth continues. The growth is continuing, and while the quarter was not completely pristine, this was a very solid quarter, and we reiterate a buy here. Let us discuss.
Explosive growth in revenues and profit, but one sticking point
There is little debate that the reported growth is anything less than outstanding. Sure, there remain questions surrounding the operations and the customer counts that bears and shorts have asserted, but as reported, total revenues were $310.9 million and more than doubled from last year. Revenues grew 103.1% from $153.1 million a year ago. Some may cite sequential slowing, but there is a degree of seasonality here. Now on these sales, gross profit was $76.4 million and this increased 89.1% from $40.4 million in Q2 2023.
Now, we mentioned it was not all pristine. There was margin erosion, and this was, in our opinion, the most bearish point of the report. The gross margin was 180 basis points lower than a year ago at 24.6% compared to 26.4%. The reason for this however was spending to increase the efficiency of newly added warehouses. There were also higher delivery costs compared to a year ago. The operating margin was also down. Net income was $27.0 million which grew 46.7% from $18.4 million last year, but this was an 8.7% margin, compared with 12.0% a year ago.
This brings us to the second most bearish point in the quarter, and that was the massive increase in share-based compensation or SBC. Share-based compensation expense was $13.9 million, a massive ballooning compared to $1.5 million a year ago, and follows increased expenses of this nature from last quarter. Overall, reported EPS increased 44.4% to $0.65 from $0.45 a year ago. Making customary adjustments, we see EPS rose 68.9% to $1.03 from a year ago. Frankly, if $1.03 was all the company earned for the entire YEAR, then we would be at 23X FWD, which is a fair price to pay for nearly 70% EPS growth. But no, this is just one quarter of earnings. The real valuation is closer to 8.5X. That is a ridiculous discount.
Key metric improvement
A few of the key metrics we follow for GigaCloud improved sharply. Notably, Marketplace GMV jumped 80.7% to $1.1 billion for the trailing 12-month periods. Further, seller GMV grew 76.1% to $571.9 million in the trailing 12 months. Active sellers increased 39.8% to 930 in this time, while active buyers increased 66.8% to 7,257 during the past 12 months. Moreover, the spend per buyer is up 8.3% to $151,276.
What is going on with the action in the stock?
First, we must acknowledge that shorts have circled the wagons, and there is 25% of the float short. Yes, the margin pressure is definitely the key negative here. But the growth is real. Simply put, the GCT valuation, through multiple compression, suggests the Street has questions. It remains our view that unless the company and its filings are a complete fabrication, so long as management continues to execute the way they have been, the stock offers a sizable upside on valuation and growth combinations alone.
This isn’t a “simple furniture business.” Rather, it is a business-to-business technology platform, connecting suppliers and resellers worldwide. Now there is some risk in that plenty of business stems mainly from China, but they are expanding more globally. Unless the customers and the financials reported are a complete fabrication, this is an attractive entry point. We liked it in the mid-$20s, and really liked it at $20. We believe that the fundamentals, coupled with a 25% short interest, set the stock up for another big spike. The action today is surprising, despite the positive report.
As we look ahead, the strong financial performance will continue. A new catalyst has emerged. The company announced an industry-first so-called “Branding-as-a-Service,” or BaaS. This service is in a pilot phase. According to management, this service is seeing growing interest among both existing and new sellers on the platform. We believe this can boost customer loyalty.
For Q3, management expects total revenues to be between $266 million and $282 million, a touch lighter than consensus. Earnings on these revenues assuming similar Q2 margins should be around $0.70 at least, or over 20% growth, at the minimum. While this would be “decelerating growth” a huge percentage of relative changes in growth become harder with larger numbers. This is still a growth company, trading at a considerable discount with massive short interest. While GigaCloud Technology Inc. stock is not for the faint of heart, we think this double-digit selloff, following market chaos over the last few sessions, sets you up to average down or start a new entry.
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