Description

Unique, recession-resistant two-sided e-commerce marketplace with double digit secular growth trading at ~10x EBITDA / 15x earnings.  Natural inflation hedge and substantial cash.

We wanted to highlight LQDT for the VIC community because we believe the company will grow in 2023 regardless of interest rates or the economy.  While it is one of the more expensive names in our portfolio today, we believe it is also one of the most defensive and therefore merits consideration in today’s environment - this is a stock that we think could go from $15 to $25 over the next 6-12 months even if the market is lower.

Liquidity Services operates several two-sided online marketplaces for the disposition of surplus assets, ranging from retail overstock and returned goods to large capital equipment and real estate.  This is a network effects business model: more sellers attract more buyers, leading to higher recovery for sellers.  

This industry lags behind in technological adoption and LQDT has been modernizing it for almost 25 years.  These marketplaces continue to take share from in-person auctions, negotiated sales, and/or small, local providers, addressing only a small fraction of the hundreds of billions of dollars of used assets transacted annually.  

LQDT has a particularly dominant position in the state and local government market with its “GovDeals” offering, handling auctions for entities such as police departments, school districts, departments of transportation, cities, counties, and states.  We believe it has only one major competitor (Public Surplus), but our understanding is that PS and GovDeals have somewhat limited geographical overlap (PS is stronger in the West, although LQDT has been winning many clients there, whereas GovDeals started in the South).  Once LQDT wins a municipality, they tend to be very sticky. 

In general, the value proposition is obvious and familiar to those who have studied two-sided marketplaces; in terms of the types of assets they sell, we would call out Ritchie Brothers (RBA), CoPart (CPRT), ACV Auctions (ACVA), or similar businesses as good “comps” to think about - scale and network effects matter.  

Liquidity Services is currently annualizing at about $1.3 billion of gross merchandise volume (“GMV”) and we believe they will exit the next fiscal year at $1.5 billion plus (15%+ growth) regardless of the macroeconomic environment.  They are currently run-rating at about $48 million in Adj. EBITDA (they have a mid to high single digit million stock comp, so $40 in "true" EBITDA) and we expect this will rise by 15-20% next year. We’ll explain the relationship between GMV and revenue in a bit, but summarily, reported revenue is distorted by a small fraction of the business that occurs on the “purchase model” (where LQDT takes title of the goods) although most of the business is “consignment” (LQDT simply earns a fee for its services.)  

As a result, we think that GMV, gross profit, and EBITDA (but not revenue) are all good KPIs to use to track the business, as well as of course operating and free cash flow (although we would caution you that stock compensation, plus a low current cash tax rate due to DTAs, inflate reported free cash flow above economic earnings).   

We believe that the company can grow its GMV at a double digit rate and that the company can generate EBITDA margins of over 25% of its net revenues / gross profit (which is a more meaningful measure than reported revenue).  Given this combination, management targets “Rule of 40” results.  We are not quite so optimistic, but are confident in the large, double-digit long-term top-line growth opportunity and operating leverage over time.  We believe shares are underappreciated today at merely ~10x forward EBITDA / ~15x earnings ex-cash with a substantial net cash cushion (15% of the market cap, $88 million in absolute terms, plus another $17 million of deferred tax assets).  

This is a low-capex, capital-light business which actually has negative working capital (i.e. they typically get paid by buyers before they turn the cash over to sellers).  For those worried about inflation, this is obviously a business model that benefits from inflation.  As an easy example, one asset category transacted on the platform is used vehicles.  As used-vehicle prices have soared over the past several years, LQDT has naturally benefited from the higher value of assets flowing through its platform.  

(For those concerned about the likelihood of lower used vehicle prices in the future, LQDT management recently noted that vehicle volumes from municipal sellers have actually been a headwind, as they have been holding onto older vehicles due to inability to source new ones - so we don’t view this as a substantial risk factor going forward, as increased volumes should offset lower pricing, and this is only one category out of many.)

We also think that they are relatively macro-agnostic and potentially even stand to benefit from a recession.  In a recession, more companies will have more surplus assets that they will want to turn to cash, and those same companies might focus on meeting their own needs by purchasing cheaper used items rather than new ones.  

Comparing results today to the ‘08-’09 period is a little bit difficult due to the business being very different, but in the parts of the business that are comparable, such as GovDeals and the commercial business, it appears that sales stayed flat or grew in the year ended 9/30/09, as lower realized prices for assets in many categories were offset by new clients and increased volume.   

We believe one primary reason LQDT is underappreciated today due to its rather unfortunate history, which we will explain below.

Brief Overview of Company History

Here is a simplified and brief version of the company’s history.  Those who want more color and depth on some of the early history should watch this presentation: https://www.youtube.com/watch?v=uZTv5i0Xfv4

Liquidity Services was founded in 1999 by Bill Angrick (who is still the CEO and largest shareholder with over 20% of the company).  Angrick’s original vision was for Liquidity to be “eBay for businesses” - he wanted to be a two-sided marketplace where commercial businesses could buy and sell goods.  The idea was simply to be a service provider like eBay; a low-touch, high-margin marketplace. 

Long story short, this model did not work at the time for two reasons.  The first is that businesses wanted surplus assets out of sight and out of mind (i.e., they didn’t want to use a self-service marketplace, but wanted more support.)  This led LQDT to develop some in-house logistics capabilities.  Second, in the wake of the dot-com bust, corporations were skeptical of online startups, so LQDT failed to gain traction.

LQDT therefore pivoted to the government market and won significant pieces of business with the DoD, as the various wars in the Middle East created substantial amounts of equipment and scrap that needed to be liquidated.  LQDT was a first mover in bringing this surplus to online buyers and it attracted a large buyer base and generated substantial recoveries for the DoD, winning several awards.  They also developed quite advanced capabilities in areas such as buyer verification as the DoD had - as you might imagine - stringent compliance requirements for certain of the items it was selling.

Under the contract terms, LQDT was earning a ton of money and upon subsequent re-bids, this eventually got competed away, and LQDT eventually exited the logistics and asset-intensive and no-longer-profitable federal government business (which we should note is completely separate from their very good, very profitable local government business.)  This led to a substantial decline in revenues and profitability from circa 2014 onward.  (We’re playing fast and loose with the dates here - we didn’t verify them exactly so we might be a year off, but this gives you the broad picture.  Also, there were multiple DoD contracts but they all went the same direction so the nuances really don’t matter at this point.)  

Meanwhile, LQDT never really lost its focus on trying to build a broader business (they didn’t set out to be a DoD contractor; that’s just sort of where they ended up.)  They acquired their way into the commercial and local government businesses.  Some of these acquisitions were very successful.  Their most valuable asset, GovDeals, was acquired in 2007 for merely $10 million in cash - this is a capital-light, competitively dominant service business that today does $50 - 60M+ in gross profit on an annualized basis, such that we believe it alone could be worth the entire value of the company today given its growth rate.  We will discuss this business in a more detail in the following section.

However, some of these acquisitions were misadventures.  The worst (and by far most expensive) was Jacobs Trading, where they essentially acquired a big piece of Wal-Mart’s liquidation business.  This was highly profitable but when the details became public, Wal-Mart got really mad (as we understand it, there was a family relationship that led to some contracting at inflated margins at the Jacobs business). A few years later, Wal-Mart more or less pulled the business - so LQDT spent a lot of money for something that no longer exists.  (Irwin Jacobs bought the dregs back for pennies on the dollar.) 

The other half dozen acquisitions (including vertical plays in trucks, energy, pharma, and so on - Network International, GoIndustry DoveBid, Truckcenter.com, etc) weren’t quite so bad, but they were not all that profitable, they were poorly integrated, and were running on an outdated legacy tech stack.  A big part of why they weren’t profitable is that the way the systems were set up, you couldn’t scale very easily - each listing required a lot of human intervention so you didn’t really achieve operating leverage with scale and it was very people-intensive.  (Management will do a better job of explaining this than we will - you can call them if you want more depth.)  

So in 2015 or 2016, Liquidity announced its “Liquidity One” transformation program, which was basically an enterprise-wide integration and modernization program - get all these disparate IT systems and businesses into one unified, scalable modern marketplace such that you drive the network effect better (they ended up seeing 10-15%+ better recovery, per management) and can put a lot more volume through the system without so much human intervention.  It also enabled a lot of buyer-facing tools such as automatic alerts for items that buyers might be interested in, allowing them to drive more targeted marketing, and other things like that.

Liquidity One was supposed to take two years and cost $20 million and… it took more like five years and who knows exactly how much, but probably $50 - $100 million.  Throughout this process, management was either overoptimistic or not transparent or both.  Suffice to say that by late 2018 - 2019, everyone (including former bulls like ourselves) was disgusted by the company’s continual lack of progress and “next-year story” nature - they were always just around the corner from driving growth and generating substantial profits.  It was “next year” for five years.  Literally anyone who looked at the stock gave up because it was just a train wreck.  

We will note that this whole time, their GovDeals asset was driving very strong double-digit growth (it’s the crown jewel), and their RSCG segment grew as well, but it’s fair to characterize the overall results of the business as a dumpster fire - flat GMV, breakeven-ish EBITDA.

We obviously cannot know the counterfactual, but we are pretty sure that in a perfect world, LQDT might still be struggling today.  Instead, in 2020 the best possible thing that could have happened for LQDT did - COVID.  Just as LQDT finally wrapped up its tech modernization program and had a scalable platform that could handle a lot more volume without a lot more human intervention, the entire world was, all at once, forced to try to do literally everything online.  For example, counties could no longer hold auctions on the front steps of City Hall for old assets, seized property, or foreclosures.  COVID drove a massive step-change in adoption of LQDT’s marketplaces.

Even as we saw this happening in real time, we were cautious - through much of 2021 - about the “COVID beneficiary” effect.  We worried that LQDT was seeing massive pull-forward that it might give up.  But we became constructive going into 2022 as LQDT’s results continued to not only hold up but grow off the higher base, even after the world went totally back to normal and other companies like DocuSign, Zoom, et al that had seen boosts during COVID started to see a reversion to the mean.

We think the reason for this is that LQDT’s business is uniquely sticky.  This may seem an odd thing to say given that LQDT is perhaps most famous for losing two big contracts (Wal-Mart and the DoD), as we mentioned previously.  However, we believe those were idiosyncratic circumstances and we think they’re less relevant to the customer base that LQDT has today.  

In the GovDeals segment, if you look at public news articles and other case studies published on the website, it is clear that depending on the asset class, municipalities see strong, often double-digit uplifts in recovery.  This is particularly true for smaller / more rural organizations (which don’t have the same massive local buyer base that you might have in, say, Chicago) or for odd assets (LQDT sells everything, from more common categories like F-150s and “yellow iron” construction equipment, to boats and planes and helicopters.)  They also save time and overhead.  

As a result, GovDeals tends not to lose clients - they don’t disclose retention per se but we believe that “unit retention” would be well into the 90s (probably in the high 90s) and rank with world-class SaaS companies.

There’s also a natural “land-and-expand” tendency, where municipalities (or other customers) may try LQDT out - and then when they see the process is easier (they’re able to sell assets in real time rather than waiting for one single annual auction) and they may get 15-20%+ more than they used to get, there is no reason for them to go back to the old ways of using local auctioneers or doing it themselves.  

We and others we know who have channel-checked this business have generally found these comments to be true.  There is also increasingly some regulatory capture, as LQDT often (painstakingly) works with state and local governments to have online marketplaces written into the law/code as an official best practice - which makes it mostly a two-horse race (Public Surplus being the other).  Anyone who is familiar with these entities understands that it is a very arduous process, which means it is hard to just sign up a bunch of people all at once, but also means that once you get in, do a good job, and have a good reputation in the space, people stick with you.

On a recent call, they noted that this was an investment area which in many cases guarantees them new business (and is mutually beneficial, since they really do drive a lot of values and truly are a best practice):

we're involved with the industry associations who are making policy, in some cases, the legislative process to formulate open and transparent and market-friendly rules and regulations, and that's what this is about.

While they continue to sign up new clients, LQDT is also continuing to grow with these clients, as mentioned above.

Why We Think The Opportunity Exists Today

After the massive COVID boom in revenues, LQDT invested heavily in sales and marketing and other business functions to enable the next stair-step in growth.  

This brought margins down a bit in the near-term and the market - naturally - feared a repeat of the Liquidity One disaster (see analyst questions on the conference calls.)  

LQDT stressed that “this time is different” - and indeed it has been.  Three or four quarters later, margins have already started to bounce back, and EBITDA has returned to levels a year ago (at much higher volumes), as the company’s investments are paying off with continued rapid growth.  

We don’t think a marketplace tech asset with long-term double-digit growth should be trading at ~10x forward EBITDA or ~15x earnings ex-cash, and we believe that as they demonstrate their continued growth (they have tremendous momentum) and generate further operating leverage (showing that they are not once again in a massive, money-losing investment cycle), the market will return to valuing them at a more appropriate level.  

Some of the investments they have made should actually improve their stickiness - for example, they have been building APIs and integrating into client systems so that clients can upload assets directly from their internal systems and sell them via LQDT.  Perhaps comparing this to Amazon’s “click to buy” is a little optimistic, but we do think that this ease of use will benefit LQDT and make it essentially an automatic behavior with clients.

Segment Discussion: GovDeals

We’ll start with a discussion of GovDeals, which is the crown jewel asset.  This is the segment that serves state and local government agencies. With thousands of individual agency clients, this is a highly diversified business.

Through a combination of signing new clients and expanding with existing clients, this marketplace has grown GMV at a very solid double-digit organic CAGR.  Note that recent growth is partially benefited by the acquisition of “Bid4Assets” which brought expanded real estate capabilities, but organic growth is still >15% per management.  

There is some seasonality to this business, but note that on a comparable basis, the only period where organic growth was negative for this business was in CQ1 and CQ2 2020 (LQDT’s quarters are off by one quarter due to a 9/30 year end).  

Revenues were down simply because municipal employees were in many cases banned from even coming into the office due to COVID restrictions, and thus were not able to upload the goods and/or have sellers inspect them.  As soon as these regulations loosened up, growth took off.

This is a very low-touch, self-service business.  It takes a long time to get in with a municipality but once you’re in, you’re in.  The company’s site has links to a lot of positive news coverage - https://www.govdeals.com/index.cfm?fa=Main.News

Examples include El Paso earning $100,000 of revenue selling “stuff sitting in a junk pile” that nobody had touched for years.  Another is the Thunder Bay police moving auctions completely online because it saved on overhead; the State of Georgia saved $1 million per year on overhead by moving to GovDeals.  Demonstrating the network effects, Middletown, OH sees the average bidder being 200 miles away including some up to thousands of miles away - things that simply wouldn’t happen with in-person auctions.  Many of these articles reference how long clients have been with GovDeals (we saw one that had been there since 2004) - highlighting the “retention” point we mentioned.

The company has historically talked about a ~$3 billion TAM for the municipal government marketplace, which would place its penetration at about 25% or so.  Even accounting for its one competitor (who we think it would make sense for them to eventually buy), there is a long runway of double-digit growth.  However, the company has recently expanded its TAM by going into the real estate vertical (foreclosed properties and the like).   

The same ideas apply here - listing it online will get you a lot more bidders than shouting from the courthouse steps at 8 AM - and LQDT thinks this adds another potentially $2B to their TAM.  Incremental GMV dollars here are lower value (since the take rate on a $200,000 plot of land will obviously be lower than on a $2,500 piece of used equipment), but it is still a highly profitable business and there is really very limited sales / overhead expense (LQDT already has the relationship with all these buyers - they are just providing them another service.)

As a result, we think that gross profit dollars in this segment will grow more slowly than GMV dollars, due to the mix shift - indeed, you can see this in recent quarters as GovDeals’ gross profit (as a percentage of GMV) has come down to about 7% in the most recent quarter vs the 9 - 10% range it was very consistently in in previous years.  

However, gross profit dollars are still growing nicely, and we see a long runway for continued 10-15%+ growth in gross profit dollars - management is targeting higher and currently running at higher but we’re reluctant to put really big numbers into our model.  In terms of sustainability, we think that at ~$700 million of GMV out of a $6 billion TAM, they could grow at 15%/yr for a decade, or 10%/yr for 15 years, and still probably have some room to grow (would be $3 billion at that point, or half the market, assuming no inflation in asset values) - so there is no worry about hitting a growth wall anytime soon.

Capital Assets Group

The worst performing segment at LQDT has been their Capital Assets Group, which sells the same kind of stuff as GovDeals (used equipment) but for corporate clients.  There is certainly more competition here (such as Ritchie Bros), although LQDT covers a broader range of categories.  

One problem they historically had in scaling this business is that they had a lot of physical work required to upload and list assets; the Liquidity One modernizations have largely automated this process and they are increasingly having clients do it themselves.  

This segment tends to be a little more lumpy and macro-sensitive - not necessarily in the “good/bad economy” sense but just in the sense of things that happen in the world can affect this business.  

This is the part of the business we are least optimistic about (based on historical results) and one of the reasons our longer-term growth rate is lower than management’s (we view this as a show-me story.)  

Retail Supply Chain

This business is the only one that is logistics-intensive.  Unlike the other businesses, where LQDT largely just provides a website and associated services (connection to freight, payment processing, etc), in the RSCG segment, LQDT actually takes physical possession of returned goods and processes them on behalf of retailers.  One of the value-adds here is “fewer touches” - in some cases, returned goods are shipped directly to LQDT.

This segment has done relatively well over time, excluding the Wal-Mart snafu mentioned earlier.  They do have some concentration risk here with Amazon, but they have a broad roster of clients that largely reflects the retailers in America.

This is a good place to discuss the purchase model.  Some clients - for various reasons including accounting, compliance, etc - want LQDT to officially purchase the assets from them, and LQDT is then in charge of reselling.  While in theory this exposes LQDT to value risk, in practice, despite all the horrible things that have happened to the company, we are not aware of any instances in which they lost material money doing this.  They have tons of data on what items are worth and we think most of the time, the purchase model is really more of an accounting/compliance formality.

Nonetheless, it is one reason why looking at revenue is not a great way to think about things.  Here’s the excerpt from the 10-K:

These amounts included sales of commercial merchandise sourced from multiple vendor contracts with Amazon.com, Inc. by our RSCG segment. The commercial merchandise we purchased under this contract represented 60.7%, 55.1% and 43.6%, of Cost of goods sold for the years ended September 30, 2021, 2020 and 2019, respectively. The merchandise sold under our purchase transaction model accounted for 16.4%, 20.9% and 23.0%, of our GMV for the years ended September 30, 2021, 2020 and 2019.

While this may sound bad, that means that LQDT bought $65 million worth of goods from Amazon in the last fiscal year (at cost) - depending on what you think LQDT sold these goods for (we think low $100 million might make sense - can’t mathematically be more than 16% of GMV assuming they sold a bunch of other goods for zero), then Amazon accounts for about half of RSCG segment GMV and about 7% of company-wide GMV.  Amazon volumes appear to have been growing with LQDT 20%/yr at the moment, but could always go away.  

We don’t think it’s critical to the investment case, but it’s certainly a risk factor.

The vast majority of GMV has moved to consignment (as you can see, 85%).  However, even if the two are economically equivalent, revenue will bounce around simply depending on the mix of consignment vs. purchase.

Think about two scenarios as shown below. In the purchase model, LQDT buys $90 worth of goods and sells it for $100.  In the other, LQDT simply sells the goods on consignment for $100 and takes a 15% “take rate” for their services:

Note that take rates vary a lot based on service level - in GovDeals they have historically been high single digit but there’s no physical operations and municipal employees are the ones doing all the listing, communicating with sellers and being present for shipping, etc.  Retail take rates are necessarily higher - retail gross profit to GMV is in the mid to high 20s - but keep in mind that they are physically operating warehouses, sorting the products that come in, listing and selling and shipping them, etc.  

So the example above is just hypothetical and shouldn’t be taken to represent unit economics - we’re simply demonstrating why focusing on revenue is pointless - depending on the structure of the agreement, LQDT could earn the same amount of money on the same amount of GMV but revenue could be anywhere between $15 million and $100 million.  LQDT generally has a strong preference for consignment and that is the direction it has been moving its business, but some customers want purchase - regardless, headline revenue numbers are irrelevant.

Moving on: there is also a bit more competition in this segment (FedEx bought GENCO and haven’t done a lot with it - there are other players out there, Optoro, b-stock, etc.)  

LQDT has opened up several new facilities recently, which is incongruous with flat recent results for GMV y/y - however, LQDT’s mix-shift argument makes sense to us.  Every retailer in America is reporting a shift away from high-dollar hard goods for the home which everyone bought during the pandemic, so the categories seeing returns today, while higher in volume, are less profitable (obviously you make less money on a returned pair of jeans than on a returned TV or grill.)  So the flat GMV y/y represents higher units of lower value and in the long term it should not be a headwind.

This segment has more than doubled organically from 2016 as a result of more returns (e-commerce drives more returns so this is a secular tailwind) combined with more companies outsourcing this business to LQDT as it makes more sense to do so rather than do it in-house.  There are certainly some who have in-house programs (Amazon’s Warehouse Deals, for example) but we think LQDT will continue to grow this segment at a HSD type rate over time.  (Management models higher, but again, we prefer to be conservative.)

Machinio

This is a small segment that we honestly don’t pay much attention to - it is a listing service that is very profitable (95% gross margins) and recurring subscription revenue - it is running at about $12MM of ARR.  Basically it is a pay-to-list service; assets that don’t sell here can be ported into LQDT’s platforms.  It is growing nicely (30-ish percent per year over the 9 months of this year, and last year as well) and certainly contributes to the bottom line, but not something we really focus on as a huge driver.  They acquired this for a little over $20 million (including earn-out) in 2018, so we think it’s been an okay investment (not a huge home-run like GovDeals, but even excluding strategic value, financially it seems to have done well.)

Valuation

One challenge in valuing LQDT is that its profitability is relatively recent, so forecasting longer-term profitability levels is inherently challenging.  As we discussed, pre-COVID, the company made a lot of money from DoD contracts that are now defunct, and so historical measures of profitability are largely unhelpful.  Then there’s the 2015-onward “Liquidity One” period, where the company bumped around breakeven or so as they transitioned the business away from the DoD and invested a lot in their tech stack.

We therefore certainly won’t fault anyone who is shy to assume LQDT’s profitability levels are sustainable - believe me, we were too (as noted, we owned this business and were continually disappointed, eventually exiting the position quite jaded - but we think their results over the last few years speak differently, which is why we got constructive on the name heading into 2022, and added more as the company’s progress has been demonstrated.)

Anyway, in FY21, the company did ~$42 million of Adj. EBITDA on ~$880 million of GMV, for a ~5% EBITDA-to-GMV margin.  As we noted, choosing the right KPI is complicated as GMV should grow relatively fast over the near term as they layer in high-dollar real estate sales, but you aren’t going to make the same margins on these given lower take rates.  

If you look at it on a GMV-to-gross-profit basis (again, revenue is largely irrelevant due to the purchase model), LQDT generated that EBITDA on ~$150 million of gross profit (for 28% margins).  We think this probably represents the high end of profitability in the future due to the mix shift and the fact that at the time, expenses were artificially low (they didn’t have travel due to COVID, they were sort of running at max on a very lean employee base, etc).

Profitability did dip as they made the substantial sales and marketing investments, but has recovered as in the most recent quarter they generated $12M of Adj. EBITDA on ~$38 million of gross profit and ~$325 million of gross merchandise volume.  So they’re back to prior annualized profitability levels (pre-investment) albeit on much higher volumes, and we think they will see operating leverage as the investments are clearly paying off and driving growth.

As such, we don’t think it’s unreasonable to model something in the range of $55 million as a forward-year Adjusted EBITDA assumption; however, if you back out stock-based comp, we get something closer to the high $40s.  The market cap is ~$570 million at current prices of ~$16 but the company has close to $90 million in cash as well as some deferred tax assets, so the EV/EBITDA is about ~10x at a $500-ish enterprise value. Looking out three years, we think that the company will generate at least $75 million in EBITDA and at a multiple that is more reflective of their long runway for double-digit growth (say 12x+ EBITDA / 20x+ earnings), we think that the company will be worth over $30, with strong cash flow in the interim directed either to buybacks or strategic acquisitions like Bid4Assets that can accelerate growth and open new opportunities.

This is not a capital-intensive business ($4 - $8M per year historically) so you can think about low $40s EBITDA less stock comp less capex or ~$30 million in post-tax earnings per year on a forward basis (cash flow, as we mentioned, should exceed earnings due to working capital.)  So the ~15-16xx forward earnings multiple ex-cash is certainly not the cheapest thing you’ll find in today’s market, but we think this is a bargain for a business that is likely to grow earnings at 10 - 15% per year without the need for any capital investment - and one whose results should be largely unaffected by a recession due to:

1. Weighting towards municipal governments (which are relatively insulated and are operating on their own replacement cycles for things like police cars, utility vehicles, etc)
   
   

2. Being a source of revenue in bad times (converting unused assets to cash)
   
   

3. Secular and company-specific growth trends (such as the increasing real estate penetration and continued signing of new clients)

Risk Factors

We’re not worried about interest rates or the economy here - in general, we think that challenging times are probably actually LQDT’s friend.  Nonetheless, here are a few risk factors we can think of.

1. Amazon exposure - as we mentioned, we don’t think this is hugely material to the business overall at 7% of GMV, although it does represent a significant portion of RSCG GMV (maybe about half).  Amazon does have its in-house Amazon Warehouse Deals offering - which we and perhaps you have purchased from on occasion - so theoretically there is always a risk they insource this. But it’s not something we lose sleep at night over as it should not be why the thesis works, or doesn’t (although given the company’s history, it would probably result in a bad knee-jerk reaction for the stock).
   
   

2. Bad acquisitions.  Obviously, the Jacobs Trading deal was a disaster, although other deals have been OK to home runs, and the most recent deals (Machinio and Bid4Assets) are both ones that we like.  The CEO is obviously spending his own money here (he owns 23% of the company), so we’re willing to look past the one bad deal from a very different era (when, in fairness, they were trying to take the unsustainable DoD profits and diversify into a different business.)
   
   

3. Deflation.  Notwithstanding inflationary headlines, there are certainly many categories of assets (such as used cars) where prices have been driven up by supply chain shortages and scarcity.  Similarly, commodity prices have come down, so anything that’s being sold for scrap might be affected by that.  We don’t think that this is a major risk factor, particularly given that higher volumes should overwhelm this in terms of GMV growth, but it is one reason why growth could be softer than we anticipate.
   
   

4. Management.  We hesitate to say this because the CEO is extremely driven and we think he will do the right things… however, history has demonstrated that he is very independent minded (for better or worse).  The Liquidity One disaster period (when communication was very poor and frankly opaque) still weighs on a lot of people (including some friends of ours who are very familiar with the company and think the company is well-positioned today, but can’t get over what happened back then).  If you review old commentary, it is also clear that investors were never really made aware of how critical the DoD contract was to profitability - it blindsided a lot of people (us included.)  We think the company is in a very different place now, as evidenced by its financials, but management still has a little bit of a black mark on their track record.
   
   

5. International tensions - a lot of their sales in CAG are cross-border and various issues there can slow down the business.

Catalyst

Continued strong results dispelling market concerns about the margins.