Newegg Commerce (NASDAQ:NEGG) outperformed most other consumer goods stocks this year. Shares have gained almost 500% year over year (mainly within the last two months) after computer enthusiasts found units of the coveted NVIDIA (NASDAQ: NVDA) RTX 30 series GPUs for sale on the company's platform. They are currently the world's fastest graphics memory cards available.

NVIDIA launched the new GPUs last September with a price tag of around $1,500 each, and supply is low. Gamers need the graphics card to play or stream video games for fans at ultra-high settings and over 200 frame rates per second. Crypto-miners also need the GPU to mine digital currencies. For example, the RTX 3080 can mine Ethereum at a rate of 121 mega hashes per second, which translates to about $6 in profit per day after electricity costs (or breakeven in less than a year).  

Amidst a global semiconductor shortage, many computer enthusiasts turned their attention to Newegg in hopes of securing a RTX GPU. But is all this enough to justify the company's $10.5 billion market cap?

A gamer sits in front of a computer with an external microphone, for streaming.

Image source: Getty Images.

The case for Newegg

Newegg sells over 40 million different types of laptops, desktops, consumer electronics, and components on its platform. Last year, it generated $2.1 billion in sales (growing 36.2% year over year) from 4.7 million customers. The company isn't well known to the general population, but computer enthusiasts have a huge affinity for it. In fact, Newegg holds over 40% market share in component categories such as processors, power supplies, and motherboards. Right now, its gross merchandise volume is very close to its revenue, so there is no doubt that RTX GPU sales would add a lot to Newegg's bottom line.

In addition, Newegg's China gross merchandise volume represents its fastest segment of growth -- at 115.3% year over year, amounting to $84.3 million in 2020. The U.S. Postal Service currently has an agreement with China Post allowing Chinese suppliers to ship their goods overseas at a very low price -- often cheaper than shipping them across state lines. What's more, customers don't have to pay duties on up to $800 worth of goods they get from America's rival. Thus, Newegg has a huge edge in wooing customers with ultra-low pricing compared to domestic electronics companies. 

The case against Newegg

Before getting too excited about Newegg's prospects, keep in mind that the company's market cap is over $10 billion, and much of its growth potential is already priced in. Furthermore, businesses focused on delivering low prices typically have razor-thin margins. Newegg is no different. Last year, its gross profit hovered at around 13% of sales. Its cash from operations margin was even less, at 3% of revenue. Whenever a company has razor-thin margins, it becomes extremely susceptible to the smallest changes in the business environment. For example, a reescalation of the U.S.-China trade war and rising tariffs could serve as a barrier for much of Newegg's growth potential. Not surprisingly enough, Newegg stock price is experiencing a sharp sell-off as China's cryptocurrency crackdown caused RTX 3060 graphics cards to plummet in price.

What's the verdict? 

Given the strength of its China-based supply model, and its ability to sell the NVIDIA RTX 30 series at a reasonable price, Newegg could go beyond its 2020 revenue growth this year. However, much of that potential is priced in with its 6.53 times price-to-sales (P/S) valuation. 

The stock is already down 59% from all-time highs last week, and there is little recourse for late investors as the fundamentals are just not quite there yet. Overall, I would consider investing in the stock at a much lower multiple, say two to three times P/S, due to its tiny margins. Check out these stocks instead while waiting for shares to cool off. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.