Description

Introduction:

Global-E Online Ltd. (“GLBE” or the “Company”) is a middleman for e-commerce brands (or “merchants”) who sell their wares internationally. It is a low margin and opaque business that has benefited greatly from the pandemic as travel was restricted and cross-border e-commerce boomed. The business model is dependent on consumers paying a premium that can be as high as 50% for brands to generate the same gross profit margin as selling the good domestically or on brands shouldering all or a portion of the prohibitive costs. To minimize such costs, successful brands often establish a business presence in markets in which they have reached a breakeven level of sales thus in-sourcing GLBE’s role and reaping tax efficiencies. Alternatively, smaller brands without much success churn out as the willingness to invest in the necessary brand awareness is lacking and fixed monthly fees to GLBE are shed. At the same time, competition is intensifying in the US, posing a material headwind to growth for GLBE with over 50% of merchants based in the UK. Couple this with the need for UK merchants to now pay or charge EU based consumers incremental duties and taxes (“D&T”). Despite such headwinds, GLBE trades at 9x EV/2021E GMV. For a point of comparison, their closest competitor, EShopWorld, with similar volumes and revenue was bought out for north of €1bn at around 1x GMV. With the stock up just more than 3x since going public in May of this year, GLBE shares should rerate to reflect the reality of the underlying economics of the business.  

Background:

Global-E acts as both the merchant and shipper of record for brands, providing them with an API to localize the checkout process to account for the applicable duties and taxes and allow the consumer to pay in their local currency. Then the merchant can opt to ship the goods to DHL or send the package directly to Global-E and they will get it to DHL. Global-E assumes liability for the product once the merchant ships the order to GLBE or DHL. As a result, the company is liable in the instances of fraud, chargebacks, payment processing billing errors etc. In 2020, the company processed around $647m in GMV. This is lower than the stated GMV which includes the amounts merchants pay GLBE which are not merchandise value. 

The pandemic has been a boon for the industry of cross-border e-commerce and the provider of solutions such as Global-E. Broadly defined, the industry doubled in 2020 and is on track to grow 50-70% this year from the 2020 figures. With D&T adding a premium of 20-30%, brands must decide whether to bake this premium into the price or to allow the consumer to decide for themselves thus breaking out the D&T. Over the past year there has been a move toward the former with brands choosing to raise prices thus showing an inclusive price to the customer. As a result, the cost to consumers is significantly different to buying the product in the brand’s domestic country. Couple this with a shipping cost to the consumer that is between 2-3x the cost of doing so in the brand’s domestic country and a fee to GLBE at 4-5%. 

For example, Marks and Spencer’s (“M&S”) is one of Global-E’s largest merchants. One of M&S’s best selling items is a cast aluminium casserole dish that retails for £59.50 delivered in the UK. In Global-E’s largest recipient market, the US, this same product delivered checks out at $105 or £76 for a 28% premium and excluding shipping. Another Global-E client is Michael Kors whose bestselling backpack retails for $325 in the US delivered or for an equivalent of $435 in Malaysia (one of Michael Kors’s stronger selling countries in SE Asia) for a 32% premium. Another example is a Versace skirt that retails for €1,700 in Italy or an equivalent of €2,500 in Argentina. Merchants can also choose to shoulder a portion of the D&T and so only partially raising prices. This is what the US watch brand, Vincero Watches has opted to do with their bestselling SKU retailing for $165 in the US or an equivalent $195 in Germany for an 18% premium. With VAT in Germany at 19%, import duties at 4.5%, and the incremental fees for shipping, GLBE’s fee and payment processing, Vincero Watches is losing around 17 percentage points in gross profit margin for gross profit dollars of $84 vs. $112 had they sold the unit domestically or passed on 100% of the incremental costs.  

For the brands that see sustainable growth in sales then it is natural to establish a presence in that country or region in terms of localizing inventory and forming a business for tax efficiency. For the consumer, the willingness to pay such a premium should decline as trips abroad return. The bigger issue for brands with less brand awareness than Michael Kors is the need to drive awareness and so traffic in international markets. Something that is often an afterthought for brands and when it does become evident, the willingness to spend is often lacking due to the substandard return on ad spend.  

History and Industry Landscape:

GLBE was founded in 2013 and is headquartered in Israel. Before its IPO this year, GLBE had raised a total of $100m with the latest in June of 2020 for $60m led by Vitruvian Partners with DHL has a follow-on investor having invested in a prior series. Other investors include Apax Partners and an Israeli VC, Red Dot Capital Partners. GLBE remains led by its three cofounders. 

The largest player in the US market is the Pitney Bowe’s owned Borderfree (which was acquired in 2015). Borderfree owns the US market with merchants such as West Elm, Nordstrom, Under Armour, Macy’s, PGA Superstore, and Harrods. 

GLBE’s closest competitor is the Dublin-based company, EShopworld (“ESW”), with clients such as Nike, Victoria’s Secret, Estee Lauder, Levi’s, and Abercrombie & Fitch. A JV of La Poste in France and Swiss Post, Ascendia, first bought a stake in ESW in 2013 for 40%, increased their ownership to 50% in 2017, and finally bought out the other 50% for a valuation north of €1bn purportedly. In channel checks, I garnered that ESW and GLBE are stacked side by side in an RFP process, a fact which their F-1 did not care to mention nor any competitors. Whereas in an interview with an Israeli newspaper, CEO Amir Schlachet, said the following: 

• "In the US, our competitors are BorderFree (an Israeli-American company) and eShopWorld. A logistics company acquired BorderFree, which wasn't so good for it, and eShopWorld works mainly with American brands, with a 'heavy' project for each customer, and they too were bought by a logistics company. Occasionally we lose deals to them, which is good because it keeps us on our toes. There is a third competitor, an American start-up that's doing good work, but they're where we were three to four years ago. 

The third competitor, Flow Commerce, is led by two entrepreneurs, each with successes in prior ventures in the e-commerce space (one sold a customer experience business to NICE and the other, Gilt to HBC). Flow Commerce raised $37m in a Series B round in December 2019. Another startup competing with GLBE in the fashion and luxury space are Glopal (Kering is a customer). Beyond these are solutions for small businesses including Zonos and Flavorcloud. Avalara has also been adding more global tax compliance features to its product offering, particularly around VAT.

Many brands go the DIY route eschewing any of the above options. This is becoming more prevalent as payment processing, fraud management and shipping logistics including returns become more global and easier to implement at scale. Overall, the industry is quickly becoming fiercely competitive and one where contracts are aggressively negotiated. 

Initial Public Offering:

On May 12, 2021, the company sold 17.25m shares, at an offering price of $25, valuing the company at around $3.5bn. GLBE netted, after issuance costs, $397m and today 145m shares are outstanding. A week after the IPO, the stock was at $28/29 then $63 by the end of June, finally hitting a peak of $74 in early August. It now sits around $70 for a $10bn valuation or $9.6bn net cash.

Prior to the IPO, GLBE struck a deal with Shopify whereby Global-E will become an option for “certain merchants” which means brands on Shopify Plus which comes with an $800k monthly sales volume minimum or $2k a month in fees, 0.25% above the breakpoint. Shopify will take of % of the GMV processed. This will impact GLBE’s already thin margins. Avalara’s move to tackle the D&T headaches will likely be available to Plus accounts given their presence there already for sales tax processing. Also available to Plus accounts are fraud management tools and shipping apps that allow for international checkout. As such I see this move as one by Shopify to acquire customers in Global-E's clients and so not a significant revenue driver for GLBE. If GLBE is introduced to all Shopify members, then it will have to contest with an average revenue per store of less than $6k per month. GLBE currently has minimum monthly fees north of around $3k. As part of the deal, GLBE issued warrants to Shopify to purchase 20m shares for $0.01 per share, of which 40% vested upon signing and 60% vesting monthly over 24-months. This equates to a 13.9% dilution on shares out today. 

Subsequently, on 9/7/21, GLBE announced that they would carry out a secondary offering of 12m shares for insiders (private equity) plus an option for the underwriters to purchase an additional 1.8m shares. Shares are down 9% since the announcement came out. 

Why GLBE is an attractive short?

I. GLBE’s business model is ripe for disruption and competition is intensifying

Global-E charges 3% of GMV for the use of their API that localizes the checkout process allowing a consumer to pay in their local currency. On the back end, GLBE remits receipt of that order to the merchant’s order and warehouse management system so that the order can be picked and sent to GLBE or DHL, at which point the digital trail goes back to GLBE to handle the transactional emails. This is not complicated and is why there have been many entrants in recent years. Quickly the industry is becoming littered with companies that can provide these services which will drive down take rates and reduce the number of prospective customers that GLBE can sign on and or increase CAC. Rates have already come down from when Borderfree was the only option for brands. An additional indication of increased competition in the US market is that GLBE and ESW bear the cost of implementation. Avalara’s move into the space could disrupt GLBE, ESW and Borderfree as many sites in the US already have a relationship with Avalara, Worldpay or Ayden and multiple shipping carriers. Thus, the risk of disintermediating GLBE’s role as the middleman is high. 

II. The business is characterized by high customer concentration

The top ten customers represented 37% of revenues in 2020 with the largest merchant, M&S, accounting for 18% of revenues in 2020. Just under 50% of revenues originate from the UK, where 53% of all merchants are based. While GLBE only tells us that the US is the largest recipient country, the EU is a large market for UK e-commerce brands that are now faced with increased costs to sell into that market. At a bare minimum, these include import duties based on the price to the consumer and a customs clearance fee (VAT remains the same albeit based on the destination country’s rate). This has created turmoil among British retailers that sell directly into the EU and has forced brands to consider a host of possible solutions including walking away from the market altogether or excluding products under or above a certain price. Others have moved to localize inventory through a 3PL thus paying import duties on the product cost as opposed to the price to the consumer at checkout. In the same interview quoted above, GLBE’s CEO said that the added complexity of Brexit provides them with a competitive advantage. This fails to consider any drop in demand as consumers are faced with prices 20-30% higher or brands a commensurate drop in gross profit. There is also a risk that brands localize inventory for tax efficiencies. This change, among both EU (12% of GLBE’s merchants) and UK based merchants, will divide merchants into two groups: those that can afford to pass on the costs and those that cannot, forcing the latter to shoulder all or a portion of the costs. The latest tax rules for cross-border e-commerce into the EU came into action on 1st July 2021. While time is needed to understand the long-term effects of such rules, there are early signs of headwinds for e-commerce trade between the EU and the UK.   

III. Covid-19 has given a bad business some respite

As detailed above, cross-border e-commerce has been a boon through the pandemic and continues to do so. However how much of this is tied to the lack of travel and when price comparison is easy, consumers might be less willing to shell out 20-50% more for a product instead of waiting until they visit London or New York next.  

The top ten customers did $24m average GMV for 2020 however the remaining average merchants did less than $1.1m on average. In contracts, which are for a term of one year, GLBE has a minimum required volume to be cleared for the ~3% to kick in. This volume is between $1.4-1.5m per year and so if the average of all other merchants outside the top ten is slightly under this then the majority of merchants are paying a fixed fee of $3-4k per month. For many brands, this will be a difficult cost to shoulder after the one-year term is up. 

Fundamentally, the issue with international e-commerce is the same as the marketplace as for many brands it is not a case of building it and they will come. The marketplace for a brand lacking top of mind awareness is more akin to the commercial office building as compared to the grand bazaar. Insofar that unless a brand is willing to shell out money for non-brand keywords and banner ads and assuming all else stays the same then what will prompt a customer to search “XYZ brand”. The same goes for international e-commerce and long-term, all but a handful of brands will need to drive local brand awareness which is difficult for brands to do at scale. 

Then there are the brands that have done well enough in markets to justify establishing a presence locally whereby they contract out a third-party distribution centre to manage inventory and fulfilment. This is the fate that Borderfree suffered over the years with its concentration of orders going to Canada. Brands signed on for an initial period to test and learn the market to later go it alone. In this regard, GLBE acts as a perfect testing environment for brands to understand which markets to sell into. GLBE’s largest customer, M&S, could be nearing this junction as both its online (domestic and international) channel grows much faster than the store line and as they grow their technology and digital headcount. 

IV. The empty promise of data moats

Sell-side analysts have characterized GLBE as the Shopify of cross-border e-commerce. Management has similarly spoken to GLBE as a platform providing merchants with a rich ecosystem of vendors. This is a mischaracterization as while GLBE enables brands to sell their wares globally, they merely localize the checkout process and do not provide merchants with any third-party services that the merchants themselves cannot avail of. In addition, management has stated the below (paraphrasing), which I can find no confirming evidence of:

• Speaking to an ever-growing data moat, “which is then fed back into our systems in order to generate even better conversion rates and more uplift.” 

• I don’t see how GLBE can help with conversion as they only take the baton when the consumer has got to the checkout (checkout conversion only). Some data suggests that making the D&T inclusive in the prices when the customer is on the product or category page results in otherwise higher conversion although this is debatable as a higher price should reduce conversion. I don’t understand how the data stemming from GLBE helps conversion as the merchant retains the responsibility of all other pages except the checkout. It is true that with more transactions and merchants, GLBE understands nuances relating to customs around pricing and taxes. However, there are limits to what GLBE can share merchant to merchant and so knowledge is general e.g., local state taxes and whether consumers like to see this broken out or not.  

• “We provide merchants with a platform integrated and coupled with a diverse ecosystem of technology and service partners via dozens of open APIs. From leading e-commerce platforms, such as Shopify, Salesforce, Magento, BigCommerce, and others, through the payment providers like Adyen, Worldpay, Klarna, and others, through the shipping carriers such as DHL, fraud management providers such as Forter, and many other partners providing value-added services, such as translations, online marketing, and more, with several of these, including Facebook and Shopify.” 

• GLBE does not have off the shelf plugins for the platforms mentioned. Merchants can indeed avail of Klarna as a payment option but the benefits of Adyen, Worldpay, DHL, and fraud management providers do not accrue to the merchant as GLBE assumes liability for these processes. The extent to which Ayden and Worldpay allow for better rates provides GLBE with a margin as brands are paying the same as they otherwise would at 2.9%. GLBE as the merchant of record retains the name, address and email address provided upon check out. This can then be used to create marketing campaigns, but this information is owned by the merchant and so the ability of brands to create a campaign on Facebook is not a service that GLBE brings to the table.  

V. GLBE’s revenue is grossly overstated

For a relatively simple business to understand, GLBE’s F-1 was opaque as to how revenue is generated. As aforementioned, GMV is defined as the combined amount collected from the consumer and the merchant meaning that GMV is inflated by GLBE’s take-rate for around 17%, which is itself inflated. The fees collected from merchants including the fees for GLBE’s API, for payment processing and shipping are not merchandise value. 

Global-E books revenue through two segments: Service fees and fulfilment services. 

Service fees primarily include two separate fees billed to merchants. Of these fees, one is billable at 3-4% of the order value including the price to the consumer plus shipping and the other at 2.9% for payment processing. Nowhere in the F-1 does it directly associate the latter with revenues. All we are told is that “Service fees revenue is generated as a percentage of the GMV that flows through our platform.” Assuming GLBE is making the thinnest of margins on the 2.9% payment processing fee then a large chunk of the service fees is a pass-through. Global-E is likely making a small margin on the FX, but this is not disclosed. 

Fulfilment services revenues are recorded on a gross basis. To this end, fulfilment services revenues are similar to payment processing as most if not all of the revenue booked is passed through to COGS and so revenues are grossly overstated. Note that we are not told that payment processing revenues are stated on a gross basis. Assuming GLBE are paying 2.5% of true GMV for the acquiring markup and interchange fees then they are making 0.4% of GMV leaving GLBE with a 14% GPM on payment processing revenues. Stripping the resulting COGS for payment processing and 100% of the fulfilment service revenues out of stated revenues leaves true revenues at $34.1m for 2020 vs. the $136.4m stated.

The rationale for deducting 100% of the fulfilment service revenues is in a related party note. It tells us that DHL fulfilled 59% of orders in 2020 for $53.7m. Based on 59% of 4.6m orders for 2.7m orders fulfilled by DHL, the average fee to DHL is $19.78. This compares to fulfilment services revenue per order of $18.79. Primary research suggests that the DHL rates made available to merchants are often lower than what the merchant can secure on their own accord. In any case, were GLBE to be making a 15-20% margin on the fulfilment services, revenues would still be overstated by a factor of 3. 

VI. Growth is fully priced in

GLBE at an EV of $9.6bn, currently trades at over 125x gross profit, just under 9x GMV and around 530x EBITDA, all 2021E numbers. In terms of the margin potential, management has provided long term targets for gross margin and adjusted EBITDA at 40% and 20%, respectively. Note that these are based on inflated revenues and the adjusted EBITDA includes SBC which is currently 3% of revenues. That said, using the shorthand of a 17% stated take-rate and the target 17% EBITDA margin, EBITDA margin as a % of stated GMV is 2.9%. 

Let’s say that they can achieve this EBITDA margin as a % of GMV of 2.9% and at the same time, grow GMV 3x over the next three years. GLBE would process GMV of $4bn for EBITDA of $116m at which the company would trade on an EV/3-year forward EBITDA of 83x. The prospect of GLBE growing GMV 3x is not likely given the need to penetrate the US market and the corresponding competition to contend with. In 2020, the GMV per average merchant was $1.8k which was up from $1.4k in 2019 and it sits around $2m on a 6/30/21 LTM basis. Assuming this number can grow at 15% annually for a 2024 GMV per average merchant of $3.1k. To process GMV of $4bn then GLBE would need an average of 1,300 merchants in 2024 or 2.5x the number they have today. 

From above, we know that the average revenue per merchant outside of the top ten is just at or under the minimum GMV volume GLBE requires to pay a variable fee. In 2019 and 2020, the churn rate was 12% and 16% respectively. I expect this churn rate to rise coming out of this year as brands rethink the fees and as travel eventually resumes. Data from 1H ’21 shows this as tying out the change in deferred contract acquisitions costs (+107% to 1H ‘20) and the 6/30/21 merchant count indicates a higher churn rate again which on an annualized basis is 20%. Modelling out a forgiving annual churn rate of 15% would leave GLBE needing to acquire around 1,000 new merchants over the next three years for around 350 annually vs. the current rate of 220.

Valuation:

GLBE’s closest competitor ESW, with a GMV of €1bn, sold for a valuation just north of this for 1x GMV. Similarly, when GLBE raised $60m in June 2020, they were valued at 1x GMV at then the 12-month trailing GMV. Then looking at EV/GMV valuations for e-commerce marketplaces, companies are trading for around 1-2x GMV with Etsy and Shopify trading at around 1.5x and 1x, respectively. 

Conservatively, the stock should see a 20-30% decline based on GLBE trading more in line with these comps. In the absence of this, a slowdown in new customers growth and or lower productivity from those customers is likely. Management said as much on their recent earning’s call when asked about guidance by merchant type, they responded that “there will be some contribution and a growing contribution toward a late Q3 of small merchants going live on the platform that are already signed."

In the medium term, it should become clearer that the Shopify partnership is far from a home run and that competition is intensifying in the US, making GLBE’s task of diversifying away from its 50%+ penetration with UK based vendors difficult. There are also Brexit related risks of increasing costs for those merchants, potentially creating a vicious circle whereby brands raise prices which in turn impacts demand. 

Lock up expiration is 11/8/21 and shares are mostly held by insiders with 46.5m shares in the public float out of a total of 144.5m. The average volume is around 1m shares. The upcoming secondary offering can be taken as an indication of further insider selling to come. In addition, there are 6.8m share options exercisable at an average strike of $1.20. 

Risk to Short Thesis:

GLBE has a cash balance of $391m, which could be used to take out one of the many entrants coming into the US market. In the Q2 earnings call, management provided no details around potential acquisitions, except that they expect to do “at least one or maybe two transactions by the year of the end”. The above thesis is intact in the event of this as there will be more than one or two well-capitalized competitors remaining including ESW and outsiders moving in such as Avalara.

Lastly, no member of the management team has previously led a public company. The closest member with any relevant experience in the e-commerce space is COO Shahar Tamari, with a prior role as the former head of e-payments for the gaming entity, 888 Holdings.

Catalyst

A slowdown in customer acquisition and or increase in churn

Lock up expiration and insider selling

Demand normalizes despite travel remaining largely restricted