Bert Hochfeld is bullish on GLBE

A few days ago, Bert published a free article on Global-e Online Ltd (GLBE). You can read it here…

Here’s what I liked from it along with my comments:

Global-e is a high-growth business and its valuation reflects expectations of a continuation of that growth. But there can be some market phases in which fundamental operational performance is disregarded and investors seek safety and ignore growth. I expect Global-e to grow at rates in high-double digits for some time to come and for it to achieve a rising free cash flow margin as well.

[As other members of this board pointed out, GLBE is indeed pretty expensive, but as Bert puts it, its valuation reflects great expectations and stellar growth.]

Notionally, the shares aren’t “cheap,” and I have no expectation that their performance will be stellar in a risk-off environment. But as I am and plan to remain a long-term investor, I will, to a greater or lesser extent try to minimize my attention on what is moving the market today or tomorrow and focus on the investment attributes of this company-of which there are many.

[To me, GLBE seems like a must-have for every single company selling online. I can’t imagine owning and running an online business (used to run one for several years) and limiting your potential to local only. The world has become one unified space since going online. Ecommerce is booming and people do not want to be limited to their local shops only. They want access to global commerce. Global-e online does just that. And does that well.]

The concept is that the Global-e platform allows on-line sellers to offer their products and services internationally on the same basis that they offer their wares locally. Simply put, sellers using the Global-e platform can offer their products and services in many different countries, without the costs and the time involved in setting up a host of international subsidiaries.

[What is even more important, GLBE enables the access to global commerce including all the hassles that come with it. This is simply a no brainer for any company that wants to test the waters before going global. By taking care of taxes, shipping/payment methods, translations, currency, and many other hurdles that come with going global, companies can now focus on what matters the most. Providing access to products no matter where consumers are located, what language they speak, what payment preference they have or what shipping method they prefer.]

Shopify bought 7.75 million shares of the company’s stock and its agreement, which runs for 3 years, makes Global-e its exclusive external provider for all of its 1.7 million merchants who run their stores on its platforms. The terms of the agreement haven’t been completely disclosed; in addition to Shopify’s direct investment, it got warrants to buy another 20 million shares, essentially at no cost, so it is a substantial owner of Global-e.

[As already discussed in the board, the Shopify agreement is simply for the bigger players. SHOP launched its own program for smaller merchants who wish to go global. This, to me, is good news for GLBE investors. And this is why. If I was a small merchant on SHOP with no international exposure and Shopify offered that for entry-level players, I’d jump right in. Then, if I saw good returns I’d want to switch to a better service to meet my new-and-improved needs. Also, if I was a bigger merchant and Shop said hey we have this service available but we also have the GLBE partnership which might suit you better, then it would make my choice easier.]

This is a company that facilitates retail transactions, and thus its business is typically seasonal, and thus sequential comparisons are not necessarily relevant. Last year, for example, GMV rose by 61% between Q3 and Q4, and then fell by 15% sequentially between Q4 and Q1, before rising by 23% between Q1 and Q2. So, the most relevant comparison is year over year; revenues almost doubled year-on-year last quarter and rose by 130% year-on-year in Q1. The impacts of the pandemic on specific quarterly revenues and revenue comparisons are obviously difficult to judge; most relevant, I think, is that sales are growing very strongly in current periods-even when comparing against the results of the pandemic influenced spike in e-commerce revenues in 2020.

[QoQ might be difficult to track as seasonality is pretty evident in ecommerce. So as Bert confirms, YoY comparisons are best to assess how the business performs.]

It is probably not terribly surprising to find that the cross-border e-commerce space is one of enormous potential. The market in which Global-e competes is best described as cross-border E-Commerce. The space is huge. Forrester says the opportunity is $736 billion as of 2023. Of course that represents the sales of product, rather than the software and services necessary to sell into the cross border space. Other studies suggest that the space is $900 billion and others forecast even greater amounts. Most of the forecast have been too low, and the growth rates have been consistently greater than has been forecast. The growth rate of cross-border e-commerce is twice or more greater than other components of on-line retail. And thirdly, implementing cross-border E-Commerce solutions correctly is a very complex process with many different facets. It is hard to do right, and most brands and merchants will not be able to do it on their own.

[Everybody wants to go global but not everybody has the time, staff, resources, knowledge, and energy among other things to do so. GLBE charges a fee which in reality is simply a cut from the additional revenue that a merchant gains from going international. In other words, it’s a service that pays itself.]

Not all merchants appreciate that outsourcing something like cross border e-commerce is a realistic alternative. I think, over time, most merchants, and most brands, except for the very largest, will find the economics of outsourcing cross border D2C simply irresistible. Merchants are good at finding products to sell and selling them. The kinds of things a company such as GLBE does, such as localization of messaging, localizing pricing, compliance, payment of duties and other taxes, shipping, and post-sale service are simply not the things that distinguish most brands and merchants.

[As mentioned earlier, merchants should focus on what matters. Which is finding great products and selling them to customers around the world. GLBE does so much to help merchants go global without all the extra worry.]

Obviously the valuation and share price movement of a company like this will be sensitive to market trends. I don’t expect that the shares will strongly outperform when market participants are concerned about the back-up in rates and inflationary pressures. But I have started to acquire a position at around current levels, and expect to continue to add to holding on an opportunistic basis. I think over the course of the coming 12 months the company’s shares will create meaningful positive alpha.

[I tend to agree with Bert here and have built up a decent-sized position (around 10%) and expect to see meaningful revenue growth from Shopify integration from early next year.]