As a result of the COVID-19 pandemic, growth in e-commerce has soared over the past year. Online shopping was over 20% of retail spend in the United States in 2020, according to a Digital Commerce 360 report, growing 44% to a whopping $861 billion. Amazon (AMZN 0.90%), as you might have guessed, topped the list of online sellers with nearly a third of the industry's market share.

Part of what helped Amazon top that list was its third-party marketplace. The service is in serious expansion mode, with sales growth of 54% in the fourth quarter of 2020. One of the companies taking full advantage of that third-party marketplace is Mohawk Group (ATER). Here's how.

What is Mohawk Group?

Mohawk Group is a mini-conglomerate of consumer packaged goods (CPG) brands. It self-describes as a "tech-enabled consumer product company." With its Artificial Intelligence Mohawk E-commerce Engine (AIMEE), Mohawk leverages data and machine learning to research, acquire, and sell consumer products online, mainly through Amazon. 

Hands typing on laptop with e-commerce icons in foreground

Image source: Getty Images.

To get a better sense of how the process works, let's look at an example of an acquisition. Mohawk recently announced it was buying Healing Solutions, LLC, an online seller of essential oils. While it doesn't specifically say why management chose to acquire Healing Solutions in the press release, you can bet it was because AIMEE identified something in the company or the essential oils market that made Mohawk pull the trigger. Mohawk was also able to acquire Healing Solutions at 3.8 times operating income, a shockingly cheap multiple, but one that is normal when dealing with smaller CPG companies. If profits stay at these levels or grow, Mohawk will recoup all of its acquisition cost in just a few years.

Once Mohawk acquires or internally develops a brand, it can trim overhead costs under the parent company umbrella, hopefully increasing profit margins along the way. It also continues to use AIMEE to optimize sales and marketing with the goal of reaching higher revenue targets in a more efficient manner with Mohawk's expertise than what the company would do as a separate entity. 

Lastly, Mohawk also sells its AIMEE software to other online sellers through a software-as-a-service (SaaS) model. Revenue from the segment is currently only a tiny portion of Mohawk's overall business, but it has high margins and a huge market opportunity. For reference, there are over 2.5 million active sellers on Amazon alone that Mohawk can target with this software.

The financials

With a stock like Mohawk Group, potential investors are betting more on the future of the company than on what the current financials look like. For the nine months ending in September 2020, Mohawk Group had an $18.7 million net loss. However, the company grew sales from $88.8 million to $144.2 million during that time period and actually generated cash before deducting acquisition costs. In the short term, investors should look for Mohawk to keep investing in growth and likely not hit more than break-even on its profit margins. However, over the long term, management has a goal of 13% to 15% profit margins. If you are a shareholder in Mohawk Group, you should expect it to hit this target at some point.

How has the stock done?

Mohawk Group went public in June 2019 at around $10 a share. The stock didn't do much until the COVID drawdown in March of last year, when shares fell over 80% to around $2 a piece. The turnaround since March has been phenomenal, with the stock trading at around $43 a share today, and it was up 400% in the last three months alone. The market cap is around $840 million and the stock has a price-to-sales ratio of 3.9, making the valuation a bit rich, but not overblown when considering what management believes long-term profit margins can get to.

If you believe in the growth of third-party sellers on Amazon and other e-commerce platforms and want to put your money behind it, Mohawk Group could be the best way to do that. Yes, the stock is up over 400% in the past three months, but it is still early innings for this tech-enabled CPG conglomerate, so don't fool yourself into thinking you've missed the boat with this business.