ChannelAdvisor’s (NYSE:Source: Pixabay

Growth Drivers

SaaS Platform

ChannelAdvisor’s SaaS e-commerce platform for online sales is its primary growth driver. Through this platform, the company offers solutions to its customers (brands and retailers) that help them easily integrate, manage and optimize their online sales across lots of available channels. The platform provides a single web-based interface which offers a unified view enabling the company’s customers to cost effectively manage product listings, inventory availability, orders and fulfillment, and data analytics. Since this platform makes online sales simple with reporting and analytics, it enjoys good demand and popularity among brands and retailers. According to a report:

The digital commerce software market was valued at USD 5733.44 million in 2019 and is expected to reach a market value of USD 10397.24 million by 2025, registering a CAGR of 12.64% during the forecast period (2020 – 2025).

ChannelAdvisor’s SaaS revenue will grow at a similar rate. However, the company doesn’t provide its SaaS revenue separately. It reports its total revenue. Its total revenue for full-year 2019 was $130.0 million.

Although amid fierce competition, registering a CAGR of 12.64% for revenue growth is difficult, it is not impossible for ChannelAdvisor. The company offers automation, analytics and optimization tools to its customers, which help them grow their businesses. As a result, ChannelAdvisor can retain its existing customers and attract new customers. Therefore, I believe the company will be able to achieve low-teens growth rate in the long term.

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Modules

The company offers a number of modules, which is its another growth driver. These modules include marketplaces, digital marketing, where to buy and product intelligence. Each module is integrated with the platform’s underlying inventory management system, templates and reporting system. A particular module integrates with a particular type of channel, such as third-party marketplaces, digital marketing websites or authorized reseller websites. These modules also support specific online functionalities, which allow customers to modify online storefronts, employ media, advertise products, etc.

The marketplaces module helps customers connect to third-party marketplaces, while the digital marketing module connects customers to comparison shopping websites. The where to buy module helps customers provide their web visitors up-to-date information about the authorized resellers. The product intelligence module provides brands and retailers insights about online assortment, product coverage gaps and pricing trends.

The company offers its software suite through the modules. Each module is priced individually. These modules strengthen the company’s SaaS platform and help grow revenue. However, the company doesn’t provide its revenue from modules separately. If we assume the modules are parts of the SaaS platform (since the main software is offered through them), we can say they will also grow at a CAGR of low-teens in the long term.

Competition

ChannelAdvisor’s competitors include Shopify (NYSE:SHOP), Salesforce B2C Commerce (NYSE:CRM), Oracle NetSuite SuiteCommerce (NYSE:ORCL) and SAP Commerce Cloud (NYSE:SAP). These companies are more resourceful than ChannelAdvisor. ChannelAdvisor competes with several other smaller privately-held companies as well.

The e-commerce software market is highly competitive. The market is in an early stage of development and therefore the competitive dynamics of the market is difficult to predict. In addition, the market is subject to rapid technological advancement, and therefore it is required by ChannelAdvisor to regularly upgrade its software platform.

For connecting to channels, several brands and retailers develop their own in-house software platform, and several channels offer software tools to brands and retailers for free, which make competition for ChannelAdvisor fiercer. In order to handle this competitive pressure, ChannelAdvisor needs to remain innovative and purpose-driven.

ChannelAdvisor’s main competitive advantage is that it offers analytical support to customers. According to a report:

Unlike some of ChannelAdvisor competitors ChannelAdvisor provides analytical support to many vendors that helps them to increase competitive performance.

I believe the company handles competition very well.

First-Quarter 2020 Results

ChannelAdvisor’s first-quarter 2020 total revenues came in at $32.0 million, an increase of 1.5% from the first quarter of 2019. The company’s fixed subscription fees came in at $25.8 million, an increase of 1.4% from the first quarter of 2019. Variable revenues were $6.2 million, an increase of 1.5% from the first quarter of 2019. GAAP net income came in at $2.0 million, or $0.07 per share, compared to a net loss of $2.3 million in the year-ago period. Adjusted EBITDA was $6.5 million compared to $2.6 million in the year-ago period. The company generated free cash flow of $4.7 million during the first quarter of 2020 compared to $0.7 million in the year-ago period.

The company delivered good results amid a sea of uncertainty due to the coronavirus pandemic. It remained unaffected to the pandemic, and therefore its share price created a new 52-week high after the coronavirus sell-off. I am bullish on the stock because I expect that a surge in online sales will happen now since people will stay home most of the time. ChannelAdvisor’s service will be needed more by brands and retailers, and therefore the company’s revenue will increase. Apart from recent trends, global e-commerce revenue is expected to grow at a CAGR of 8.1% from 2020 to 2024, which is also favorable for ChannelAdvisor.

Valuation

ChannelAdvisor’s most comparable peers include Shopify, Salesforce, Oracle and SAP. ChannelAdvisor’s non-GAAP forward PE multiple is 21.39x compared to Shopify’s 1,668.91x, Salesforce’s 63.93x, Oracle’s 13.62x and SAP’s 25.67x. ChannelAdvisor’s trailing 12-month price to sales multiple is 3.08x compared to Shopify’s 60.40x, Salesforce’s 8.92x, Oracle’s 4.54x and SAP’s 5.49x. ChannelAdvisor’s trailing 12-month price to cash flow multiple is 23.46x compared to Salesforce’s 40.32x, Oracle’s 13.25x and SAP’s 41.69x.

ChannelAdvisor is attractively valued compared to its peers. The company has a strong balance sheet comprising of $56.35 million of cash and $15.14 million of debt. The company is cheaply valued despite it having a couple of strong growth drivers. Its SaaS platform is a feature-rich e-commerce software platform. Its modules perfectly complement the SaaS platform. The only problem of ChannelAdvisor is that it doesn’t generate significant revenue. I believe the company’s SaaS platform coupled with the modules will help grow revenue meaningfully in the coming years. Once the revenue base (source of major and regular part of total revenue) starts to expand, the share price will rise significantly. Therefore holding the stock for the long term is essential for making big profit.

In the last five years, the company’s revenue has increased at a CAGR of 8.89%. I expect revenue will grow at low teens in the next five years. The basis of my expectation is the report presented in the growth drivers section. Trailing 12-month revenue is $130.4 million. If revenue increases at a CAGR of 13% in the next five years, its mid-2025 revenue will be $240.3 million, or $8.47 per share. In the last five years, the company’s shares have traded between the price-to-sales multiples of 1x and 3.9x. Applying a price-to-sales multiple of 3.9x on the company’s mid-2025 revenue per share, I get $33 as the mid-2025 share price.

Risks

Rapid technological advancements are driving the e-commerce market. For retaining existing customers and attracting new customers, ChannelAdvisor must be able to enhance and improve its existing products and introduce new products that can quickly adapt to these technological advancements. If the company fails to do so, it won’t be able to retain existing customers or attract new customers. As a result, its revenue growth and operating results could be negatively impacted.

For growing its revenue, the company depends on its relationships with various third parties, such as technology, content and logistics providers. Integrating their technology and content with the company’s products is a time-consuming job and requires significant resources. If after doing so, the integrated product is not well-accepted in the market, the company’s brand and reputation could be negatively impacted, which in turn could adversely affect revenue growth.

Conclusion

ChannelAdvisor said in its first-quarter 2020 earnings call that it saw a broad acceleration in GMV (gross merchandise value) processed on its platform during the initial phase of the pandemic, since a huge amount of consumer spending shifted online this time. I believe online sales will continue to remain expanded in the rest of 2020, which will drive the company’s revenue higher. The global e-commerce revenue will grow in the high single digits in the long term, as mentioned above, which indicates that ChannelAdvisor’s revenue will continue to grow post the pandemic. Therefore I believe ChannelAdvisor is a good company to own for the long term.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.