Chit Chat Stocks - Global-E Online (GLBE) | Deep Dive

Episode Date: July 1, 2021

Global-E Online provides a platform to enable direct-to-consumer cross-border e-commerce. The company aims to eliminate borders when it comes to online shopping. Listen closely this week as Brett and Ryan dive into what the company does and how they could improve in the future. Enjoy the show! Subscribe to 7 Investing with the code "CCM": https://7investing.com/subscribe/ Follow us on Twitter: https://twitter.com/chitchatmoney Subscribe to our Youtube Channel: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ Email us: [e-mail] Timestamps Company Background | (2:18) Industry | (8:08) Management & Ownership | (9:42) Valuation | (11:19) Earnings | (13:02) Balance Sheet | (16:01) Our Analysis | (17:12) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or recommendation. Now, please enjoy this episode. Welcome in. This is the Thursday Deep Dive episode on Chitchat Money. My name is Brett Schaefer, and I'm here with Ryan Henderson. As always, we do not have Ian Gray on the show today.

He's not joining us over Zoom. He's in the midst of his, we'll call it, intense internship at the investment bank. So he's working long hours. We might not have him every episode this summer, but don't worry. He will be back in the future. We're talking global e-online today. This was recommended for us to check out by who? Feroldi? Brian Feroldi. He said, check out. We'd like to, I don't know. We DMed and he said he liked the business. He said it's worth checking out. It was kind of a response to one of my tweets saying that I haven't found any home runs in a while. um and he was just naming off a few companies he liked so globally um not a recommendation by him i should say that disclosure i guess uh but something for us to look at but before we get

to that sponsorship alert seven investing their new picks come out tomorrow well the day you're listening i guess so july 1st uh we just had max chats go on the show uh and if you've listened to that you probably already subscribed because uh he he was exceptional his expertise is is it's strong yeah definitely has an edge in uh i guess clean energy biotech that kind of stuff the stuff the over underlooked i guessed parts of the market um anything else so use our code ccm yes use our code ccm get ten dollars off your first month try out the service i mean it's great you're going to get research from all different types of industries give you idea generation for stocks to add to your portfolio.

All right, Ryan, do you want to introduce Global E Online? I'll say first, we were discussing this. Tough name. They may need a rebrand. It sounds like a 90s IT service. Yeah, Global E Online is the official name. That's ripe for change. I don't know.

I mean, it's impossible to fit into a sentence properly. But their mission statement is to make global e-commerce border agnostic. They say, go global, be local. it's actually kind of nice to see a mission statement that isn't like we're changing the world uh i felt like this was honestly a strong s1 or f1 i guess is what they had to report and they just recently went public so but basically what they offer is a range of solution for merchants that help them increase their international sales so merchants sign up for one of two offerings it's either global e enterprise or global e pro and then pay global

various fees based on their transaction volume. So revenue should grow in line with gross merchandise volume, assuming the rates stay steady. But for context, some of the solutions that are included are native website languages. So marketing messages and checkout come in the preferred language of the shopper. So if you're thinking about that, it's like if you're in the U.S., you're not going to get some Italian language on your website. You're going to get English, assuming that they use something like this. And then localized currency pricing. So they adjust prices based on the shopper's geography. They have over a hundred different currencies that they use, differing payment methods. So over 150 to choose from, pre-calculating

import duties and tax remittances, which is really tough. So they're just basically trying to reduce as much friction for the merchants as they can. They do that for over 170 different destination markets. If you remember when we talked about Avalara or Avalara, cross-border sales are very difficult tax-wise and very difficult for merchants to track. So anything that can help on that is really helpful. But if I'm not mistaken, they use third-party apps, right? So, okay, yes and no. I kind of tweeted something out when I was trying to research the company, like why are they a competitor to Shopify? Why isn't Avalara like with them? And I think that they do stuff for enterprises on their own. So this is like Forever 21 is kind of a big company that they

brag about being a partner with Global E-Online, but that partnership with Shopify and I believe BigCommerce as well. Well, I don't know when the BigCommerce one started, but the partnership with Shopify started this April and it goes on the Shopify app store. So if you're already with shopify you can utilize global e-onlines tools uh but you know you have to pay for it separately okay does that make does that make sense so it's like a way for them to access the smaller merchants which would be really tough for them to do but as far as as far as the tax remittances or uh import calculations do you know if that's done natively by them or can they access avalero through their service i was confused i was confused i bet if you're on

Shopify or any other one of these places you can use either, but they didn't mention Avalara in their F1 at all. There wasn't one word of them. So to be honest, I'm not really sure. I was a bit confused on that part because it seems like they're competing a bit, but we'll see. I don't know. And then they also offer delivery services. So you can choose sort of from their fulfillment network, which ones are optimal for you. And then they have native language return processes as well. So just adjusting the language for returns. But an example that I would use is if it's not clear what the company does, let's say an Italian based shoe seller or something like that has set up an online store using Shopify. They can sign up to Global E,

let's say Global E Pro, and then they get the shopper, let's say comes from the US, then stumbles across their shoes online. He goes to the website and the website language is converted to English, the prices are displayed in dollars, and the overall shopping experience is just much more frictionless for the shopper, which obviously should convert to higher sales. And so that's kind of the customer value prop from the merchant side. Is that all kind of a clear definition? Yeah, definitely makes sense. Yeah. And then I'll get into the history. There wasn't a whole lot, but the company was founded in 2013 by Amir Shlachet. I'm probably saying that wrong. I apologize. And Shahar Tamari and Nir Debbie in Israel, within three years,

they reached 50 million in gross merchandise volume. For reference now, I think they're north of 700 million. And they launched in the US in 2017. They do have financial backing from Shopify, but they also have it from several Israeli venture capital firms. Yeah, we'll talk about how Shopify kind of finagled their way into here. But they're like a recent, they're a recent partner. Yeah, so a month before going public, Shopify and Global E initiated a partnership where the two entered into a warrant agreement, which would allow Shopify to purchase up to 19.6 million shares. Seven days later, Shopify partially exercised that option and bought almost 8 million shares. So fully executed, it would make them one of the largest shareholders, but not the largest, I don't think.

And they went public in May, or Global E did. So that deal was done right before IPO. Yeah. And then just for reference, for people that are thinking like, all right, how many merchants are actually using Globally right now? It's only 440. So they're really going for the enterprises currently. With the Shopify one, it's probably a lot higher. I think that number might be up in Q1, but that was based on the F1 number or the end of 2020. Yeah, it can't be much higher. If I'm remembering correctly, the number was still in the 400 range. So that Shopify partnership, while it could add a ton of merchants, it's still in the really, really early days. I'll go through the industry and the competition. So the company estimates that cross-border e-commerce opportunity is going to be $736 billion by 2023. I kind of throw my hands up to that number. It's like, well, yes, it's a large market opportunity for sure. I don't know. You don't really need the exact number, but, you know, instinctually the niche of this e-commerce industry. So, you know, within e-commerce,

which is growing pretty fast and then cross-border e-commerce as a subset of that is probably growing even faster. And I would guess is going to grow rapidly over the next, next decade. They outline some competitors in the F1. So there's other platforms, which, you know, would be Shopify, or BigCommerce, or Wix, and there's a few others. They're kind of frenemies with Shopify at this point. There's social networks that they outline as partnerships as well, these more open marketplaces. You could toss in Etsy and eBay as well. And then they

partnered with Facebook to kind of mitigate that risk, or maybe, I don't know, maybe it wasn't to mitigate the risk, but they are partnering with Facebook. And then there are in-house solutions. So, for example, someone like Amazon doesn't need Global E. They will just do it themselves. But that's probably, you know, only a few of the largest merchants in the world. Yeah, there's also smaller niche alternatives. I believe there's like language changing, like ones for particular offerings, not the whole set of solutions that Global E provides, but more niche alternatives. So there is competition. They're not alone in the market. But I'll get into management and ownership.

And this is typically Ian's part, so I'm kind of covering that. But each founder is an executive. Amir Shloshet, once again, apologize if I'm butchering that, is the CEO. Shahar is the COO. And Nir is the chief marketing officer. Each of them owns about 4.5% of their shares outstanding. Pretty solid. aggregate compensation to executives was around 2.4 million in 2020. Not too crazy. Obviously, there's no need for crazy compensation given that each executive owns more than 4% of the shares outstanding. And then they had several funding rounds prior to going public. I think they reached a series E round. And so there's a lot of global VC firms that were participating. Some were, one was from Luxembourg. I think they were the largest. And then there was an Israeli based one as well. So they've amassed, those VC firms have amassed a large chunk of ownership. And then a lot of them have representatives on the board of directors,

but the lockup agreement with the underwriter stays. They can't sell until 180 days after the offering looks like that starts in November. If I was basing it off the May IPO. So kind of expect some selling given that so many, so much of the ownership is from VCs. And then the CEO kind of passes the gut check i watched a few videos with him talking he seems competent he seems focused uh he also holds a degree or a master's in electrical engineering from tel aviv university and bachelor's degrees in mathematics physics and computer science so academically he kind of checks out um yeah i guess that's all for management you want to get valuation yeah and they're based in israel if you kind of tell you know tell by the names and

all the mention of Tel Aviv. Valuation right when I was looking it up, market cap is about $8.8 billion. Ticker is GLBE. I will just give out one number here, and that is the trailing price to gross profit. And it is 202. That's not a typo. So no ifs, ands, or buts here. This is a really premium valuation at the moment. If they can keep up the Q1 gross profit growth, that forward price to gross profit will come down to 76, although unless they see really strong margin expansion, the full year revenue outlook implies it won't keep up with that growth, but it'll still be pretty strong. And I'm sure Ryan will get into that. On top of this, Shopify still owns those warrants that Ryan mentioned that will further dilute shareholders and then options

outstanding equate close to $1 billion in further dilution at the current share price. Now that might have changed a lot during the IPO, but I assume all, there was a lot of them that hadn't been, that weren't exercisable. So it will, it won't just be at one time. It'll be over the next five, 10 years or whatever, but you know, there's at the current stock price, there's about $1 billion in further dilution from stock options or RSUs to employees. And most of these looking at the average exercise price are not going to be, or are going to be exercised unless the stock falls 90% or more. So, you know. Worth noting, it was, shares were down 7% this morning when we were recording this. There we go. There we go. It's a little, it's a little cheaper at

least. Yeah. I'll get into the earnings. So gross merchandise volume in the first quarter was up 133% to 267 million. Revenue, and keep in mind that's quarterly, they were at 700 something million in GMV for 2020. Revenue was 46.2 million. That's a much higher take rate of GMV than I would have thought. That was up 134% year over year. Like I said, kind of in line with GMV. And that's the fulfillment stuff, but it's lower margin. Yeah. Most of it came from fulfillment services revenue, but it's not like 90%. I believe it was probably around 60% of overall revenue. But gross margin was 33.3%. Net loss of 1.7 million. They had negative 20 million in operating cashflow for the quarter, but this is a company that has

demonstrated profitability before. So in 2020, they had 21% operating cashflow margins. I'm going to say that that's not – that was all working capital and accounts payable stuff. I don't think that one was repeatable if you look at their gross margins. But they have been cash flow positive each of the last three years. Either way, they have been cash flow positive, but I would not expect 21% operating cash flow margins going forward. Yeah, and the guide – I'll get into this, but the guide for your little under 10% adjusted EBITDA margins for this year. So I guess you could say break even. net dollar retention rate of 172%. Worth noting that this is taken by dividing. So it's gross

merchandise volume divided by the preceding gross merchandise volume from the same cohorts. So it's not necessarily revenue, although gross merchandise volume and revenue should grow in line with one another. And then gross retention, which is basically giving you a churn figure was 98%. So it's really sticky. And it seems like they're going after probably larger merchants. It's not smaller ones that are churning all the time. And then as far as current year guidance goes, they're expecting just over 1.2 billion in gross merchandise volume and around 210 million in revenue. And then like I said earlier, a little under 10% adjusted EBITDA margins. So growing fast, but obviously a premium valuation there too. Yeah. And that churn number

looks good but i would check in the f1 and look at what they're using to define that it was insanely complicated just from their gmv number they didn't use just gmv or anything from the quarter they used what they call quote total seasonality adjusted annualized gmv now i have no idea what that means i'm sure churn is good but it sounds like it might be not a real number i dug into it a little bit. It is very complicated, but it is, I think they make it sound more adjusted than it is. I think they're just doing that for simplicity purposes on their end. Churn did look minimal. Yeah, that's something you'd probably expect. There's probably a strong lock in here. I'll hit balance sheet quick. Really simple. Raised $375 million in the IPO. That would give

them about $425 million if you take the cash balance from Q1. Extremely light balance sheet. I mean, they have no big liabilities outside of funds, payable, operating leases, all that, you know, standard stuff you're going to see. And those are minimal as well. No large assets either that shareholders really need to worry about. I mean, it was all cash and some receivables, small amount of property and equipment, and then a few line items. Yeah, I mean, the intangibles aren't on there. I mean, the balance sheet, yeah, the liabilities was basically just a few things they're going to owe their counterparties. uh nothing i mean there's nothing to worry about it's more of like all right does this software have the potential you think yeah and i think there were seven they're headquartered in israel as well uh and it sounds like there's some operating lease stuff that's probably the

biggest liability yeah i mean it was tiny either way i guess i'm referencing that to the market cap so i guess versus how much money they're actually bringing since the valuation is so high maybe it's not tiny but yeah it wasn't that large um all right let's take an ad break and then we'll We'll talk, you know, product experience, highlights and lowlights, and then go over some of the bull case, bear case, all that good stuff. Cox Panoramic Wi-Fi includes advanced security to help protect all your connected devices. You'll get real-time alerts. Oh, like this one.

So you don't have to worry about malware. Or when your kid downloads a song from a shady link. And now all your computer can play is... Red color, red color, where are you? all blocked thanks to advanced security included with cox panoramic wi-fi advanced security must be enabled in the panoramic wi-fi app restrictions apply okay welcome back next up we're gonna have product experience anecdotal evidence i don't really have any um haven't really shopped internationally so i'm not really sure that you know i don't have any personal experience with

that problem of that you know the difficulty of all that stuff but i assume it's it is really tough. Yeah. I mean, if I see a website or a retailer in a different language, I'm not going to waste my time. I will probably just sign off. I'm not going to, sometimes there's like Google translate that is offered on there, which is nice, but there's still lapses in that. And sometimes the descriptions don't exactly make sense. So yeah, usually it's a major turnoff on the shopping side. But as far as product experience for me, yeah, I've never used it from the merchant side. there were some good reviews, but keep in mind, there's only about 440 merchants at the end of 2020. So probably not going to be too many sort of positive testimonials there since there's just

not a huge customer base. But the growth retention number and then the sales conversion statistics that they tout should kind of give you a glimpse at how valuable the product is. Yeah, for sure. All right. Future growth opportunities, what do you have? So I was going to let you go first and obviously expanding on their product offering is important, but that's kind of above my pay grade to know what the next merchant solution needs to be. That's, I mean, you could say expanding to more countries. They're only in us, Europe, UK, Israel right now, you know,

the more countries it's kind of one of those, I don't know if I'd call it a network effect, but the product is more valuable if they can get to like 200 countries instead of 30, you know what I mean? Yeah. And then as far as what they actually offer merchants, I'm not sure. That's if they've found something or if I found something, they probably already implemented it. But I think I'm going to go with adding additional partnerships. So Shopify is obviously the most popular e-commerce hosting platform, but there are other companies in there as well. I think Wix and Squarespace are the ones that come to mind. So kind of widening the top of the funnel there makes sense to me since these platforms are where merchants spend most of their time. That's sort of the dashboard for them.

I think kind of meeting the customers there is probably the best place to go. Yeah, for sure. And that's my future growth opportunity. They have the partnership with Shopify just announced this spring, like we mentioned, and is why Shopify owns those warrants now. And it opens up globally to a ton of smaller customers. I don't have the numbers in front of me, but they Shopify has at least a million merchants using its service and possibly closer to two million. I don't have the exact numbers, but that's just a huge potential. And we'll say it's potential, not guaranteed influx of new merchants to join Global E.

But the only question is who, you know, who is the leverage? Who got the better deal? Is it Shopify or Global E or is it going to be both? Because I really think, you know, Globally is clearly going to be giving up some margin here with Shopify. Shopify gouged them with those warrants. I mean, smart, really, you know, smart move by Shopify. And Globally is kind of at the mercy of them because they're the most powerful platform in e-commerce. You know, who, I don't know, who do you want to bet on, Shopify or Globally? I mean, maybe they'll both do well.

And it clearly will open them up to more customers. but you know you got to think all right what are the what are the net benefits of this partnership i would just gut instinct i would think the partnership's a good idea and it's almost a vote of confidence i guess for shareholders that shopify is a shareholder as well there yeah and it's something that if they're a partnership you can flip it around the other way if shopify as large they are as many developers as they have if they don't want to build this themselves. It's kind of like Avalara where the product is too complicated. They'd rather just outsource it. It would take too much time globally. He's already built that up. You know, I, there's

two sides of that coin, but the dilutions there, I hate dilutions. So, uh, all right. Highlights and low lights. What do you have for customer value? Prop seems really high there. It definitely seems like they're reducing friction for the merchants. Um, and the sales conversion, I imagine that it really helps boost it just thinking as a shopper there. And then cross-border e-commerce has grown at twice the rate of domestic e-commerce. And it's expected to continue outpacing domestic for years to come. And then as far as gut check with the management, they seem really competent as well. Honestly, this company checks just about every box minus, I guess, susceptibility of where they are in the marketplace so uh i would just think that some of these larger website

building and hosting platforms or even like amazon could build some sort of competitor or could replicate a product well i would now it's a bit out of my pay grade i don't know this but i would assume that amazon has the tech uh but they just keep it for themselves yeah and or for the people on FBA? It does seem, it's kind of like the Avalara conundrum where it seems weird that they haven't built this or haven't tried to build it. Maybe that's a testament to the product or testament to global E. And then also it's just worth noting, I guess, lowlights, there are alternatives. It's, I know we're not supposed to talk about valuation and lowlights, but it's getting priced like they're the only player in the market. There are alternatives. Also,

when you think about, I mean, they're getting $212 million in revenue from 440 merchants, let's say, that's their expected current year, it feels like this really only applies to the big, big merchants. So I wonder how valuable that Shopify partnership really is. Yeah, it's interesting. And it may be because as a small merchant, they never had the chance. So there's a world where, you know, Global E just totally takes off on Shopify. And that would be huge for them. But, you know, time will tell. Because when people want access to that stuff and if they can get the fulfillment done everything like that figured out i think that would be huge but you know time will time will tell and it's kind of like you said the the you

know stock is pricing it like that's already been accomplished i just worry that maybe the smaller merchants don't have the ability to spend on something like global interesting yeah i wonder what their price point is i mean 440 well even though it's that's what i don't understand is Is it transaction or volume-based? It's volume-based. It's volume-based. But I just don't understand why they only have 440 merchants. It's not like this is something no one's – obviously, there's kind of merchant referrals, network effects there.

Yeah, that number seems a bit low. But, I mean, you can't complain. They're growing revenue at 100% year over year. So it's weird. It's weird. Generally, not a lot of low lights as far as business goes. No, definitely not. Highlights for me, they're solving a really, really complicated problem that apparently not even Shopify or Facebook want to tackle itself.

So that's an indicator that they're providing a ton of value to their customers, at least to me as an outsider. Large market opportunity ahead of it. I mean, they're not going to get $736 billion in GMV overnight. And remember that GMV isn't a financial. so they're you know they have a large take rate but it has to go down to revenue and their margins are very low right now they're expanding but you gotta look at gross profit um lola that comes into the lowlights for me they are a little margin they are an arbitrage play in a sense that is relying on things being complicated and the reason i say that is

because there's a lot of talk and it may never happen about um gosh what is it you know those The tax remittances. The remittances, and this is the concern I had with Wise, which was the IPO, the company that owns TransferWise is, you know, they're relying on global finance being incredibly complicated, built on these illogical systems. If, say, I don't know, crypto or whatever solves it, or they make those, what do they call them, the central bank digital currencies, stuff like that. And everything turns frictionless and it's basically all solved when everything changed. now i don't know how the likelihood of that happening is but it really takes away this arbitrage that they're playing maybe that's totally wrong but i think there's a risk here in that sense there's a big there's a decently sized left tail risk and then they have major

customer and partner concentration worries i forget the number in the f1 but i think their largest customer had 18 concentration and then you could see shopify being you know a huge part of their their revenue yeah all right uh bull case bear case you want to hit your bull case first yeah you know looking at the valuation i mean i don't think it's exaggeration to say that you need to be underwriting 20x sales growth from these 2020 levels for this to make sense at all now maybe that can happen that could uh i i like i said there is a world where shopify just opens the floodgates of that 10x revenue. I don't know how likely that is to happen. I don't know how much you want to bet on that, but the potential is there. And I think that's

really what you have to be focusing on. Can they just get compound revenue at 100% for a long, long time? Yeah, that's similar to my bull case is that growth persists. These new partnerships maybe spur an acceleration in adoption for the product, especially from smaller merchants, and what they offer is differentiated from any other offering, and people can't replicate it because it's too complicated. In that world, then yeah, it's probably going to be a valuable business in the future as well. But that gets into the bear case, which is valuation currently, and I'll just go ahead and hit mine. If you get some slowed growth

or if you get multiple compression, it's hard to imagine getting any tremendous return given the current valuation. I mean, you have to, you look at like, okay, even at a super premium free cashflow or earnings multiple at say 40X, just run the numbers through of what you're implying there based on a trailing price to gross profit of 202.

Yeah, we talked about it this week. There was a list of the top 50 returns of the last 15 years or companies with higher than a 20% rate of return, and only two of those 50 had a sales multiple above 10. um it's you you just you price in a lot of growth um especially i mean 202 times gross profit obviously that's the trailing number that should compress um that's a steep price to pay there's no way around it yeah and i'll just mention that the average gross profit multiple is gosh what would it be i think it would be like i don't know six seven or eight for the market on average if the sales multiple is like two or three so yeah you know that's you're paying up uh bear case for me is the same i mean it's purely business looks solid and really compelling i mean but this feels like a dot-com bubble stop to be honest uh the multiple is it's so high i i wrote

absurd but i don't want to say absurd it's really high i can't focus on anything else maybe it's blocking me from seeing a great business but it scares me and i i don't know if there's that risk of just not 95 downside maybe you know if they can't execute they yeah they're nothing else to say yeah and that gets into more or less interested which for me i'm gonna go i am i am more interested as in it's going in the watch list yeah um but it's going to need serious multiple compression for me to take any action on it or be more interested um i guess to be a good investor you have to get good at saying no for now uh and that's what i'm doing with this business yeah i'm in the exact same boat definitely going on the watch list it's a

impelling business their numbers look great they're they're showing pretty good efficiencies from a financial standpoint because even with the low margins that i was concerned about they're generating cash i mean i like that a lot but management checks out a lot of stuff checks out here and it's definitely going on the watch list i'll be tracking you know and watch this kind of means like all right you track to see how their earnings do you might not take a whole look into the conference call or something like that just be like all right what are the headlines numbers doing all right what are the stock trading at but man it's gonna need uh i yeah we we've discussed it it needs a big change in the stock price um but yeah that's

gonna do it for this episode stop for next week uh it's ian stern so we'll let him do it i don't know if we're gonna say we're not gonna say one uh and then if he grabs one for next week if not it'll be a surprise so check back in uh next thursday yep for sure all right that's gonna to do it for this episode. Thank you to 7investing. Check out their picks. I mean, it'll be out today, so perfect timing. Remember, we are not financial advisors. Anything we say on this show is not formal advice or recommendation. Ryan and I are general partners at Arch Capital. Arch Capital clients may hold securities discussed in this podcast. Thank you all for listening. We'll see you next time.

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