Global-e: On The Cusp Of Its Growth Inflection (NASDAQ:GLBE)

Global-e (NASDAQ:GLBE): It Looks Like Its Time Is Now

It has been 8 months since I last wrote an article about Global-e and its potential growth inflection. The shares are down 13% since that point, compared to a 15% gain for the S&P and a 22% gain for the E-commerce ETF (EBIZ). While the company has reported two quarterly beats, its guidance has wavered and the shares have fallen. There is an old saying about “it’s a long road that has no turning.” That is as apropos for the evolution of Global-e shares as most anything else, although that hasn’t made this road any less painful to traverse.

Global-e shares are part of a group of smaller, high growth IT companies. They are considered risk-on, and the market in recent weeks has been searching for risk-off. Some of that is interest rate angst, some of that is geopolitical angst, and some of it is rerating angst. There are many articles on Seeking Alpha and elsewhere that have made market calls. This article is not one of those; it is a review of Global-e and an update from the last article I published on SA.

That said, Global-e shares are not going to rise when investors are focused on risks. While the valuation of the shares has compressed substantially, and its EV/S is now around 6.5X and its projected free cash flow margin has reached 22%, the shares need a less toxic market environment to appreciate. Valuation anomalies always have the potential to increase and to last longer than is rational, and I certainly have no specific expectation of how the conflict between Iran and Israel plays out and if it impacts the global economy in any perceptible fashion.

Global-e’s forecast has proven to be a bit more granular than is usually seen from tech companies. Global-e’s revenues are a function of cross-border sales of its customers. There is basically nothing that the company can do to regulate the GMV of existing customers. So, GLBE forecasts are never going to be terribly precise-it is a risk of owning the shares through an earnings presentation. News about sales in a given 2-3 week period has the potential to mislead investors as much as it has to suggest a trend.

The first bit of bad news for Global-e came back on November 14th when the company released its quarterly earnings. At that time, revenue and GMV fell slightly short of the company’s prior forecast. On the other hand, adjusted EBITDA was a beat, and the company wound up increasing its EBITDA forecast for the full year. Of more salience, was the commentary during the conference call that macro headwinds during September and part of October negatively impacted same store sales growth. The company’s revenues fell about 4% below expectations. Not terribly surprisingly, the shares fell by 27% the next day. Subsequently, investors started to look at what the company had actually said at the time of that earnings release, which was far more positive. And indeed, GMV growth rose sharply, with the company enjoying a Black Friday weekend in which its GMV growth was greater than 50%. That news brought the shares up by about 25%, although this was achieved during the sharp stock market rally that transpired at the end of 2024.

The next quarterly earnings report released on Feb. 21, 2024 continued the drama. While Q4 results were substantially above guidance the company had provided at its last earnings release, and profitability metrics were also substantially above the prior forecast, once again, the company delivered guidance that disappointed investors; the company forecast revenue growth for the full year of 2024 of about 32%, about 500 bps less than the prior consensus metric for that metric. The Q1 forecast, which is for revenue growth of just 21% was well below the prior consensus. Obviously, with revenue growth forecast to be 21% in Q1 and 32% for the full year, growth expectations are for a conspicuous acceleration over the course of the year. In any event, the disappointing Q1 guidance drove the shares down by 17% the next day.

But wait, there is more. This one is not the kind of headline that is available through either SA or other published news sources. But at the start of this month, the company CEO, Amir Schlachet, gave an interview with a brokerage firm, Capital Market Laboratories, which then published the transcript. Many of these kinds of affairs are anodyne, with not much new information provided. That was not the case with this interview. The CEO was more than ordinarily positive and offered specific commentary about the totality of the pipeline and the progress of the Market Pro offering. While nothing was said specifically about Q1 results, the inferences that were drawn by listeners wound up driving the shares up 8% in the wake of the published interview.

As can be seen, Global-e shares and shareholders have endured a bumpy ride, and over the past year, the shares are up a scant 10%, despite revenue growth of greater than 40% and EBITDA growth of 90%. Obviously, the forecasts provided in the wake of the last two earnings calls have resulted in significant losses for holders-and that includes this writer.

I don’t have a crystal ball with regard to what Global-e management might say when it reports earnings. While the macro environment for retail sales in the US has been favorable, retail sales in Europe have been basically flat. UK retail sales were up 3.5% year-on-year, but were also about flat sequentially in March. At this point, US revenues are 50% of the total, while EU revenues are 16% of the total and revenues in the UK are 30% of the total. That said, the absolute growth in retail sales is not the main driver of Global-e’s business; growth comes from increased same store sales, and most significantly from the deployment of the company’s solutions at major new accounts.

Currently, consensus revenue growth estimates for the company show growth of 20% for the March quarter, accelerating to 28% for the quarter ending in June and to 32% for the full year. Global-e forecasts adjusted EBITDA; it does not explicitly forecast non-GAAP EPS, but it does report GAAP EPS. I believe that most analysts do look at non-GAAP EPS; based on normal exclusions as well as the amortization of the imputed cost of the commercial agreement with Shopify that is reflected in the GAAP net income presentation, my calculation is that non-GAAP EPS was $.58/share last year. The company’s forecast for 39% growth in adjusted EBITDA implies that non-GAAP EPS will reach about $0.75+ in the current year. Results for Global-e are very seasonal as it is a retail company in which the holiday season is very significant. This seasonality is supposed to be more substantial this year, based on the go-live dates for several significant new merchants who are launching on the platform in Q3 and in early Q4.

I imagine that overall, Global-e’s quarter will exceed expectations for both revenue and profitability. It should be remembered that the shares were recently made a tactical buy by the analyst team Wells Fargo. Those kinds of calls are typically based on specific data points regarding quarterly results. The assumptions the company used for forecasting Q1 growth were notably conservative, relating to the specifics of Borderfree (a past acquisition) revenue, as legacy business with retailers through the Borderfree platform is coming to a planned end.

The company’s pipeline, as disclosed by the CEO in the interview cited earlier, is almost certainly at levels not really expected. Admittedly, entering a Global-e position before the last two earnings releases would have been painful-so far as it goes, owning the shares through earnings has resulted in plenty of pain as this writer has experienced-but the combination of a compressed valuation, a de-risked forecast, and the commentary of the CEO have suggested to me that taking advantage of the current valuation compression is reasonably prudent. I am recommending that readers buy Global-e shares at this time and this price.

Reviewing The Solutions Global-e Is Offering, Including Its Use Of AI

Global-e is probably not the best known company that I follow. It’s still relatively small (next 12 months revenue I project to be about $810 million) and the company occupies a particular niche in the e-commerce world. That said, it has some unique technology that is resonating with merchants and its partnership with Shopify (SHOP) is in the earliest stages of driving substantial revenues.

Global-e at this point provides its customers with two different kinds of services. One service it provides is that of a freight consolidator and delivery agent. Basically, it outsources and manages cross-border fulfillment for merchants selling directly to consumers on a global basis. Fulfillment services were 51% of revenue last quarter, compared to 55% of revenue in the prior year. Fulfillment services revenue grew by 23% last quarter. Fulfillment services have relatively low gross margins, but are reasonably profitable given that they do not incur substantial operating expenses. Global-e has partnerships with many international delivery services so that it is able to make a modest mark-up and facilitate international deliveries for many ecommerce brands who need to ship to their customers globally. While fulfillment revenues are growing, this is not the exciting component of the company’s business.

The other component of Global-e’s business is that of services. Services consists of providing customers with an end to end offering that allows them to sell directly to consumers internationally through a localized website. The Global-e service can take payments and can make remittances in local currencies, it can facilitate deliveries and returns, it automatically calculates local taxes and duties, and it facilitates different payment options for consumers. It offers tools so that users can build a website that is localized and adheres to traditional local mores and regulatory requirements. Basically, Global-e is able to facilitate a direct to consumer capability for brands and retail outlets. The cost of the service is far less than the cost of internally developing all of the necessary capabilities for all but the largest brands and retail stores.

Last quarter, services revenue was 49% of the total and grew by 43% year over year. Over time, service revenue should become an increasing component of Global-e’s business. Services has much higher gross margins than fulfillment, and the mix shift in favor of services has been the primary factor in rising gross margins. Last quarter, Gross margins were 42.7% of revenues, up from 41.3% of revenue in the prior year quarter. This has been a consistent trend for Global-e; as services revenue has grown as a percentage of the total, gross margins have also increased. Global-e does have a significant level of non-GAAP operating expenses compared to other e-commerce companies. That said, it has been able to achieve leverage at scale, so my baseline expectation for the company is that it will continue to achieve consistent and noticeable non-GAAP operating margin expansion.

I confess that I am not familiar with many of the brands using the service. But some more prominent companies that I do know include many of the various brands of LVMH (MC.PA). Other Global-e customers include Adidas, Diesel, Marc Jacobs, Ralph Lauren, Hugo Boss, Disney (DIS), Netflix (NFLX) and Burberry. It might be observed that many of the company’s customers are high-end fashion brands. This has apparently been one reason why the company has seen substantial swings in same store sales growth over short periods.

The company has a variety of partnerships with IT vendors, of which that with Shopify is by far the most significant. But it works with the Salesforce (CRM) Commerce Cloud, Wix (WIX), Big Commerce and SAP/Hybris (SAP). At this point, the company has indicated that its largest new customers are on-boarding using the Salesforce Commerce Cloud.

Global-e also offers an analytics platform based on its large data set that it has collected across a variety of brands and geos. It is in the process of developing a marketing service called Borderfree. The IP on which this service will be based was acquired as part of the acquisition of Borderfree from Pitney Bowes.

Global-e offers solutions for all sizes of brands and merchants. Initially, the company focused on larger merchants who use the tools and the capabilities available from Global-e to build a custom cross-border direct to consumer ecommerce capability. The other component is that of Markets Pro, an offering available through Shopify. Markets Pro is unique in that it can be activated by Shopify merchants with a couple of clicks. It cost users nothing to activate, and there is no customization required. Just activate, and the user has a local website from which to take orders and generate incremental revenue. Beneath the covers this is an incredibly complex offering and the ability to activate it with a couple of clicks and no customization either required or possible, makes this a unique offering in the ecommerce world.

Markets Pro first reached general availability for American Shopify clients in September. The product as introduced didn’t have all the functionality that many users might be looking for. At the moment, there are few integrations, there is no return capability in the software, and only express shipping is enabled. No one really knows the dimensions of the opportunity. Some estimated have ranged that Markets Pro will contribute between 5%-10% of Global-e revenue this year. Since there has never before been an equivalent product, most estimates for the next year or a bit more will be guesses.

What I and I believe other analysts and investors looking at the interview transcript were surprised at was this comment about the pipeline and the growth of Global-e’s business:

So, I asked this similar question last quarter and as I look back at my questions, I think I’m going to repeat it every time we speak.

So, excluding Shopify, how was the pipeline of merchants and how are the channel partners helping? Was there a slowdown in onboarding of new merchants, a slowdown in new merchants going live, just not Shopify, just the Global-e core?

AS: No, actually there’s been an acceleration also on the non Shopify side to an extent in which I think if you look pipeline wise, if you look at what’s planned to go live in 2024 overall, even with the introduction of (Shopify) Markets Pro, I believe that roughly the mix of Shopify versus non Shopify is going to stay roughly the same because we have quite a few, especially big merchants that are in integration and plan to go live later in the year, especially in the second half of the year.

The bigger merchants we are on-boarding now, they’re all non-Shopify, they’re all either on Salesforce or, there’s a bunch of them, but we think, I think the overall the mix is going to stay roughly the same this year.

In terms of revenue growth for 2024, this would probably lead to an outcome that is notably better than anticipated. Additional quantification would have been desirable, but to the extent that big merchants are entering the Global-e platform at rates greater than most anticipate, this would create a substantive upside to current estimates for the full year of 2024.

Generative AI is going to be one of the most pervasive technologies ever seen. I would not classify Global-e as a company that is going to see an outsize benefit from its deployment of the technology. But the company has started to deploy generative AI technology as part of its solution. At this point, it has a customer services chatbot that is now in production. The bot apparently is able to deal with customer service inquiries quickly and accurately, and its deployment avoided the need for additional hires by Global-e during the most recent holiday season. The company is using co-pilot technology such as that now available from GitLab (GTLB) to speed up coding.

While I certainly recognize generative AI as a key theme in the investment world, and this company isn’t directly involved in creating generative AI applications, its use of AI technology will be a factor, amongst several, in providing a margin tailwind.

Competition: Global-e’s Platform Approach Has Been A Differentiator

The famous author, Flannery O’Conner, wrote a collection of short stories in the 1960s called “Everything That Rises Must Converge”. Ms. O’Connor was more than uncommonly prescient in describing the IT space. The eponymous story of the collection has nothing to do with IT, which really didn’t exist as an identifiable category at that time, but is a commentary about the rapid change in southern US racial mores. But the title is apropos for what does happen in many IT spaces and one such category is that of Cross-Border, Direct to Consumer, Global-ecommerce. Everyone wants to say they do it because the category is rising rapidly. The difference between the O’Connor story and Global-e’s competitive position is that while everyone wants to say they have an all-encompassing platform, the reality is something quite different.

Obviously, when it comes to fulfillment/shipping, Global-e has many competitors. It is a freight consolidator and its service helps merchants ship internationally. It contracts with companies such as DXL (DXL). Other competitors in the space include FlavorCloud, Eunimart and Reach. I have linked here to a listing of such competitors.

The market that most investors and analysts associate with Global-e is that of Direct to Consumer, ecommerce. According to one analysis linked here, that market is currently around $142 billion, and is forecast to expand at a 15%+ CAGR. That is really not the market in which GLBE competes. There are many brands who have embraced the direct to consumer business model and sell directly from their website. However, the requirements to sell direct to consumer internationally are far different and far more complex.

At the moment, there is not much 3rd party analysis that relates to business to consumer cross border e-commerce. This market, because of the complexity of requirements, is just in its earliest stages of development. Many brands and retailers want to extend their market to consumers outside of their home countries; few of them have the expertise or resources to do so without 3P software such as Global-e offers. I have provided a link to a listing by a 3rd party research vendor of alternatives to Global-e. Many of the competitors shown are cross border shipping specialists. Some, such as Avalara, are specialists in a particular phase of the market (Avalara is a specialist in tax and compliance requirements). Perhaps the closest competitor to Global-e is Zonos. It has been successful in some particular categories, but in general doesn’t sell to the larger brands in what is called the lifestyle category.

It appears that, at this point, that Global-e has the most extensive cross-border e-commerce platform that seemingly covers requirements that make it suitable for some of the largest brands. I think that looking at the company’s backlog and most recent wins suggests the strength of the service offerings. Global-e is not a software company, and it therefore doesn’t report the equivalent of a net expansion rate. But it has had a significant track record of launching with brands in a couple of countries and then going to many more countries over time. In addition, many brands start with a couple of their products and eventually extend their use of Global-e to all of their products. And the company continues to expand the list of countries in which it has a presence. Last quarter, significant new name accounts that went live that I at least recognize included the Harry Potter store, a brand called Glossier EleVen by Venus Williams, Mugler, a L’Oréal brand, and Kylie Jenner.

The company has also continued to add features to its platform; in all, the combination of an extensive feature set, broad geographical coverage and integrations and partnerships with many commerce platforms has given Global-e significant advantages in selling to large brands.

Global-e is unique at this point in its ability to address smaller merchants through the Shopify partnership and the Market Pro offering. I think many readers are likely to be aware of the opportunity. Smaller brands who want to establish a cross border direct to consumer presence really haven’t had a viable solution until this offering. It can be enabled through Shopify with a couple of clicks, it costs literally nothing to set up. No customization is required, and a brand is able to start selling and receiving income almost immediately. At this point, there isn’t an alternative on the market, and given that it is a part of the overall Shopify ecosystem, with hundreds of thousands of potential users, it has been a significant component of expectations for some time. I think it is unlikely that there will be competitors for this part of Global-e’s business opportunity for the foreseeable future. What I don’t know at this point is just what the revenue ramp will be for the offering, and the margin parameters of the deal.

Global-e’s Business Model-It Has Continued To Deliver Leverage As It Scales

Global-e margins have shown a noticeable uptrend over the past couple of years, although it has had positive adjusted EBITDA margins since 2021. Global-e is not a software company, but that does not mean it can’t achieve the kinds of margins that software companies have been able to achieve. Because its revenue stream is not primarily software, it has lower gross margins than those most common for software companies. As mentioned earlier, gross margins have been on a relatively consistent uptrend for some time now. The uptrend was briefly interrupted when Global-e acquired Borderfree which got most of its revenues from consolidating international shipping for its clients. More recently, the rapid growth in service revenues has driven the increase in gross margins. To repeat, last quarter non-GAAP gross margins 42.7%, up 140 basis points year-on-year. The trend in gross margins can be seasonal; it also may be impacted by volumes coming from Markets Pro.

Global-e has a commercial agreement with Shopify. A significant component of the costs of that agreement consists of the warrants granted by Global-e to Shopify. The imputed value of those warrants is being amortized through the income statement at about $150 million a year. The company removes that cost when it reports adjusted EBITDA and, of course, there are no cash costs. In considering cost ratios, I have removed the reported expense of the commercial agreement.

Research and development has been the largest opex expense category, but it was surpassed by sales and marketing expense last quarter. Non-R&D expense was 10% of revenue last quarter, down from 12.6% of revenue in the same quarter the prior year. Non-GAAP sales and marketing 10.8% of revenue last quarter, compared to 12.8% of revenue in the year earlier period. Non-GAAP General and administrative expense fell from 8.6% of revenue to 6.3% of revenue last quarter. Non-GAAP general and administrative costs were actually down year-on-year.

The company’s adjusted EBITDA margin was 19% last quarter, compared to 16% in the prior year. The company’s adjusted EBITDA margin is essentially equivalent to non-GAAP operating margins. For the full year, the company’s adjusted EBITDA margin was 16%, compared to 12% in the prior year. The company is forecasting an adjusted EBITDA margin of about 18% this year.

The company’s forecast is back-end loaded; while full-year revenue growth is forecast to be in the low 30% range, Q1 revenue growth is forecast to be only 20% because of the timing of deployments from some of the new large customers, the ramp of the Shopify offering, and the sunset timing of revenues from the past acquisition of Borderfree. Most of Global-e’s operating expenses are essentially fixed in the short term; the company’s services revenue component probably has incremental gross margins close to those of a typical software company. That is almost certainly true for revenues associated with Markets Pro.

The company is in its earliest stages of developing demand generation software. This offering is a longer-term opportunity based on the development of IP initially acquired as part of the Borderfree acquisition. Over time, and of course, depending on the degree of success the company achieves with this offering, it should have positive margin implications.

For the most part, the company has exceeded its forecasts, particularly in terms of profitability. Last year, its initial forecast for 2023 were for GMV of about $3.45 billion, revenues of $570 million, and for adjusted EBITDA of $72 million. Actual results for the year were GMV of $3.56 billion, revenue of $570 million, and adjusted EBITDA of $93 million.

Global-e’s free cash flow has run slightly ahead of its adjusted EBITDA. This is basically a function of the build-up in funds payable to customers, a metric that is correlated with the growth of GMV rather than anything else. The free cash flow margin was 18.6% for the year, compared to the adjusted EBITDA margin of a bit less than 16%. The valuation analysis I look at is based on a free cashflow margin of 22% for all of 2024.

Global-e does use stock-based comp., but unlike software companies, where most of their costs are related to payroll, most of Global-e’s costs come from the cost of fulfillment and services. This has meant that the stock-based comp ratio is far lower for this company than is the case for other high growth IT companies. Thus, the stock-based comp. ratio last year was 8% compared to 9.5% for 2022. I look at dilution, as the best way to actually measure the cost of SBC; dilution for the latest quarter was around 1%.

Risks To The Thesis

Quite clearly, the biggest risk to the Global-e investment thesis relates to the ramp and ultimate success of the Markets Pro offering. There is a significant set of expectations regarding the adoption of that service and its ability to yield substantial GMV and revenue. It offers merchants and brands an opportunity never before available, so its ramp is inevitably a guess more than anything else. The risk here is just how much expectations for its success have been built into estimates and valuation. While the service offering was released in the US in September, and there has been adoption, it probably is not yet creating lots of GMV. This is a first iteration, and some features such as a returns’ capability, integrations with 3rd party logistic support, and a multiplicity of shipping options have not been part of this initial release.

Overall, according to the company, “Markets Pro continues to see encouraging adoption rates post the September launch in the US.”

The company is all-in on its use of bots and AI to automate its support capabilities, and some of that is already visible in the leverage the company has achieved. A risk is that the company goes too far and too fast; not every consumer will be willing to deal with a support process that is totally reliant on bots. (And yes, I typically prefer humans to bots, but then I am older than typical, I suppose.)

The company’s forecasts are dependent on trends in what it calls same store sales. Its platform is used to sell lots of luxury/fashion products to consumers in many markets. GMV can be driven by promotional activity, as was the case in the run-up to the holiday season at the end of 2023. It obviously can be affected by macro trends. The last two quarterly earnings reports led to noticeable share price declines as the company talked about uncertain trends in consumer spending.

This section is a catalog of risks rather than a forecast of likely events. In that regard, Global-e is reliant on a continuation of its partnership with Shopify to achieve financial goals for growth and profitability. The commercial agreement with Shopify was recently extended, and I think it highly unlikely that anything will happen to derail the relationship, but it is worth noting in a list.

Wrapping Up: Reviewing The Case To Buy Global-e Shares

Investing in Global-e has been a frustrating journey for many, and that includes this writer. It is almost impossible to know in advance what this management might say about the current state of same store sales amongst its merchant community. That said, this uncertainty seems more than reflected in the current valuation of the shares. And, for what it’s worth, the latest retail sales data covering more than 80% of the company’s GMV was positive.

Global-e can in some sense be credited with creating and exploiting a category-that of cross-border, direct to consumer ecommerce. This is a category still in its earliest stages of development, with substantial opportunities. While there are competitors in the space, and particularly competitors when it comes to providing global ecommerce shipping solutions, the overall Global-e platform is the market leader and seems likely to remain so for the foreseeable future.

The company’s Markets Pro initiative with Shopify is also still in its earliest stages. While it’s difficult to gauge the ultimate extent of the opportunity, and some expectation for the service is built into estimates, it is likely to be a major factor in growth for years to come as the product evolves and as it goes viral within Shopify’s ecosystem.

I called out the recent interview the company CEO provided at a boutique brokerage. Those things can be anodyne to the point of uselessness. In this case, the CEO talked very positively about the company’s non-Shopify backlog. It was clear to me that in terms of go-to-market, this is not a one trick pony-its opportunities go well beyond that of the Shopify partnership, and the Shopify partnership itself goes far beyond Markets Pro. The adoption of the Global-e solution by many large brands and its momentum in the market is probably under evaluated by most, and to adopt a phrase, it should lead to “higher for longer” in terms of the company’s CAGR. The company offers a classic “buy” alternative for brands trying to ramp their international presence. It is simply faster, more efficient, and ultimately cheaper to outsource a cross border direct to consumer offering through the use of the Global-e platform, than it is to try to recreate the functionality either internally, or through the use of various pieces of a solution available from many different vendors.

Global-e’s valuation has become far more attractive than it has been in the past. I estimate that its EV/S based on a 12-month forward revenue estimate of $810 million is less than 6.5X. That’s actually a bit below average for the company’s growth cohort. When considering the company’s free cash flow margin that I estimate will be around 22% this year. The combination of the company’s EV/S ratio and its free cash flow margin have taken its valuation to about 25% below average for its growth cohort

Overall, the company has a Rule of 40 metric of well above 50, and perhaps as much as 60. While certainly the company faces an uncertain macro environment and an unknowable ramp with regard to the Markets Pro initiative, my guess is that the current forecast has been de-risked for those elements. And the company’s potential leverage for positive revenue growth is probably under-estimated as well.

I am well aware that Global-e shares are classified as “risk-on.” They won’t go up in the kind of market environment that was seen over the past 6 weeks. But as a long-term investor, I am not trying to call or make recommendations based on transitory sentiment patterns.

I am a bloodied shareholder, no doubt. That said, I believe the shares really offer investors substantial positive alpha over the coming year and beyond.