Due to COVID, the e-commerce environment has accelerated about ten years into the future. We believe that with the reduced churn rate and more relevant offerings, ChannelAdvisor (ECOM) is poised to take advantage of the more competitive e-commerce environment.
Background
ChannelAdvisor is a market-leading channel manager that enables brands and retailers to integrate, manage and optimize their merchandise sales across a hundred plus online channels including Amazon, Etsy, Shopify, Google, eBay, Walmart, Facebook, and many more. ECOM offers solutions such as marketplace integration, analytics, digital marketing, inventory management, and drop shipping. Billions of dollars in merchandise value are driven by ECOM’s platform every year with 2020 being a record-breaking twelve billion dollar Gross Merchandise Value. Roughly 2700 customers use their platform. ECOM’s revenue comes from an even cross-section of industries from clothing and apparel to consumer electronics. Another way to think about ECOM is a company that enables brands to better allocate capital. Being a brand, especially in a more competitive market, each incremental dollar needs to be allocated optimally. Should it go into advertising to drive more volume? Should it go into a lower price on another channel? Should it go into faster shipping or more efficient shipping?
ChannelAdvisor has been plagued by stagnant growth for the last several years as its business model has changed from servicing smaller customers (<500k in revenue) to larger brands. ECOM’s platform was initially built to help small to medium-sized sellers on eBay sell their products. As the years progressed and the e-commerce industry transformed, ECOM began migrating its focus towards supporting enterprise customers (large retailers and brands) through multichannel offerings. This shift in focus led to churn among their smaller customers. With respect to brands, their revenue has been growing roughly 20% yoy with about a 95% retention rate. Brands need to use every pathway from fulfillment to marketing to advertising. Net revenue retention for brand customers was in the mid-90% range, compared to close to 80% for retailers. ECOM’s goal is to have brands constitute greater than 50% of their revenue by 2022. This would equate to a 25% yoy growth rate.
Due to COVID, the e-commerce environment has accelerated about ten years into the future. A myriad of companies has leveraged their brand to bring/strengthen their online marketplaces. Some examples are Walmart, Google, Target, and Shopify. Amazon has been the de facto marketplace for the last ten years with about 40% market share by gross merchandise value. Structurally amazon competes with their customers which has caused some tension with brands leaving amazon’s platform such as Nike. Amazon’s ecosystem is roughly half 1P and half 3P. 1P (first-party) means means Amazon acts as the retailer, and the brand is the wholesale supplier. 3P (third-party relationship) is when the brand is the retailer and sells directly to buyers on Amazon. The long tail of items that is sold by 3P is because there’s not enough volume on an SKU basis for Amazon to buy those items at wholesale and sell them.
A more competitive ecosystem makes ChannelAdvisor’s offerings more relevant as there are more marketplaces that consumers can shop. Marketplaces are converging as transactional marketplaces have added advertising (amazon) and advertising marketplaces (google) have added transactions. The long tail of marketplaces ECOM serves has a GMV larger than Walmart and eBay combined, second only to Amazon. Coming into 2021 we believe that with the reduced churn rate and more relevant offerings, ChannelAdvisor is poised to take advantage of the new e-commerce environment.
ECOM is the Cadillac of multi-channel marketing software. ChannelAdvisor is far and away the largest and most dominant channel manager. The statement below shows the disparity in size between them and their competitors.
“We invest I think more in R&D than the collective revenue of those competitors” – David Spitz Q1 2020
Along with being the largest, it has been ranked the # 1 Channel Manager for the ninth year in a row. ECOM is geared towards enterprise customers that have greater than 1mm in e-commerce revenue. Smaller customers do not have the budget nor the bandwidth to use their software. Customer reviews also corroborate this with smaller customers not liking their software and complaining about costs whereas the larger ones are more than happy with ECOM and have seen numerous benefits. Some of these benefits are seeing a 20-30% increase in revenue from simply using ECOM’s repricing tool which dynamically reprices goods based on competition. The number of customers that fit ECOM’s enterprise profile is about 25k which gives it plenty of runway. Channel managers benefit from a virtuous cycle in that the larger they are the more customers they will draw which incents more partners to join their platform. Larger applies to channel offerings they have as well as the ecosystem they have (from fulfillment partners to developers).
Risks
The CEO has sold half of his shares (a meaningful dollar amount) in late 2020. Although this is not a positive sign, this may be a case of profit-taking at these levels being too hard to resist. David Spitz has been the CEO for the past five years and seems capable with a compelling vision of ChannelAdvisor. He has hired new management that is much more data and customer-focused than previous ones. This also could be a case where he does not believe in ECOM’s future and is cashing out.
Digital marketing makes up about 15% of ECOM’s revenue and has been stagnant for the last several years. It is possible that this is due to retailers who primarily use ECOM for this service. Retailers are a large part of ECOM’s business (about 60% of revenue). Retail revenue will most likely remain stagnant as most retailers cannot compete in the e-commerce space.
Mobile usage will eventually dominate the way consumers shop. This means people shop on fewer touchpoints. Phones have small amounts of real estate and it acts as a forcing function on the number of apps people use. China is a great example of this where most people shop using their mobile phones. The industry is dominated by about 4 players. We believe this to be a long-term risk as a lower number of marketplaces reduces the need for ECOM’s offering.
Catalysts
ECOM’s Starter Edition offering could take ahold with smaller revenue customers (launched in Q3 2020). This is ECOM’s entry-level product that gives smaller revenue customers access to the three largest marketplaces (Amazon, Walmart, and eBay). This software offering is also more user-friendly. ECOM initiated this to draw in the smaller customers without having to use a sales force as these CAC’s were too high. This long tail of customers would be a sizeable revenue for ECOM.
The prevalence of Direct to Consumer continues to accelerate as the distance from brand to consumer compresses. This tailwind will benefit ECOM for many years to come.
Valuation
ECOM is already FCF positive with about $15mm per year. Given its fixed cost base, each incremental dollar is high margin. With the new e-commerce environment, we believe that their brand revenue can increase 25% yoy for the next few years. If they achieve this, ECOM would trade at about 10x 2023 Earnings to EV. This is earnings, not revenue. We believe given its dominance and the step-change in e-commerce, ECOM should be worth significantly more than this. ECOM is a play on the knock-on effects of a more competitive e-commerce environment. Our thesis is that brands today are akin to hotels and hostels that were not listed on various booking websites ten years ago. They realized that if they were not listed on sites such as Expedia and Bookings they were losing a serious amount of customers. It is now table stakes. Although the dominance of Amazon and retail has hindered competition up until now, we believe that brands are beginning to realize that having a wide e-commerce presence is existential. As marketplaces begin to become commoditized, ChannelAdvisor will become more and more relevant. If channel managers start becoming more prevalent in the e-commerce world of today, ECOM will be worth multiples of its current value.
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