ChannelAdvisor claims it "empowers retailers to sell more." Founded in 2001, the company is a provider of cloud-based solutions deployed by retailers and manufacturers to integrate, manage and optimize their merchandise sales across various online channels.
In early May, ChannelAdvisor delivered strong results for the first quarter, with revenue up nearly 30 percent — including core revenue growth of 32 percent, the fastest organic growth in seven years — and record bookings. But investors weren’t impressed: the stock fell as much as 25 percent over the three sessions following the report.
Organizations use the ChannelAdvisor platform to do everything from manage their product listings and check inventory availability to optimize price changes and select the best search terms across multiple comparison-shopping sites, e-commerce marketplaces and search engines.
The company supports roughly 150 shopping engines, 35 marketplaces worldwide and all of the major search engines.
According to CEO and cofounder Scot Wingo, customers usually come to ChannelAdvisor with an acute need to solve a specific pain point across their e-commerce businesses. They almost always want to automate and expand online, then optimize return on investment across the various channels.
E-commerce is growing. Is ChannelAdvisor poised to capitalize on it?
How It Makes Money
ChannelAdvisor uses a gross merchandise value (GMV) model, so subscription fees are structured to include both a fixed charge and a variable component. That allows the company to participate in a share of its customers’ GMV processed on the platform. For example, a typical customer’s monthly subscription fee might be $1,000 ($12,000 paid up front) and include a specified level of GMV coverage; for GMV above that level, there are tiered overage fees averaging 1.5 percent.
Last year, GMV processed on the company’s platform rose 26 percent to $4.4 billion and variable subscription fees accounted for 33 percent of total revenue. In the first quarter, fixed subscription fees represented 73 percent of total revenue (up from 65 percent in the year-ago period), as more customers traded up to higher GMV levels to better match their increased e-commerce revenue.
With management estimating the total addressable market at roughly 100,000 organizations worldwide, ChannelAdvisor’s current penetration rate is just 2.5 percent.
The company has a lot of growth potential in international markets (less than 30 percent of its current customers are located outside the US despite the fact that non-U.S. markets represent roughly 67 percent of global e-commerce), especially when it comes to helping facilitate cross-border trade via marketplaces — e-commerce hubs featuring multiple sellers in which the consumer buys directly from the vendor.
Marketplaces are Growing
ChannelAdvisor management expects marketplaces over the next five years to see strong growth. Compared to search and comparison-shopping sites, marketplaces in certain countries and geographies already represent the majority of e-commerce — 90 percent in China and as much as 50 percent in Latin America. In the US and Europe, it’s estimated that marketplaces today only represent about 25 percent. As this figure grows, it will put more pressure, from a shopping perspective, on search engines.
In 2014, the company is focusing on expansion in China and Brazil. China is actually ChannelAdvisor’s fastest growing region, and the company has a new strategic partnership there with Alibaba (via its Tmall marketplace).
In China, ChannelAdvisor’s team in Shanghai over the past few years has already been involved on the export side (helping Chinese manufacturers sell to Western countries). The new arrangement involves imports (Western brands selling into China).
In Latin America, ChannelAdvisor has a new partnership in place with MercadoLibre. GMV from both Tmall and MercadoLibre will begin flowing on the platform this year, but these arrangements won’t start to provide material revenue for ChannelAdvisor until 2015.
Stock Took a Hit
In the first quarter, ChannelAdvisor beat the consensus revenue estimate, showed accelerated top-line growth from the December quarter, boosted its customer count by 28 percent year over year to 2,565, increased average revenue per customer (on a trailing 12-month basis) by 7 percent, maintained a subscription dollar retention rate above 100 percent and even raised 2014 revenue guidance a bit.
All of this still was not enough to prevent the shares earlier this month from falling to just above $19 (they have since rebounded to around $24), a drop of nearly 62 percent from the all-time high of $49.90 in March. ChannelAdvisor went public in May 2013 at $14 a share.
With the recent sharp pullback in the stock, ChannelAdvisor’s market cap is down to $594 million, 6.9 times the 2014 consensus revenue estimate of $85.7 million and 5.5 times the 2015 consensus of $108.6 million. Revenue growth this year and next is expected to average 26.4 percent.