Is It Too Late to Buy GigaCloud Technology Stock?

GigaCloud Technology (GCT 3.84%) has taken investors on a wild ride since its initial public offering on Aug. 18. The Chinese e-commerce solutions company went public at $12.25, started trading at $19.20, and closed at $15.69 on its first day. But the following day, it soared as high as $60 and closed at $48.01.

Those post-IPO gains were stunning. But is GigaCloud becoming another meme stock like AMTD Digital (HKD 0.80%), the Hong Kong-based fintech company which saw its stock inexplicably skyrocket from $7.80 to over $2,500 after its IPO last month? Or is GigaCloud's recent rally actually sustainable?

Image source: Getty Images.

What does GigaCloud do?

GigaCloud bundles together discovery, payments, and logistics services in an end-to-end marketplace. It fulfills orders for "large parcel merchandise" like furniture, home appliances, and fitness equipment.

Its marketplace is a B2B (business-to-business) platform that connects product manufacturers (primarily located in Asia) with resellers across other regions. Management says that product manufacturers consider its marketplace an "essential sales channel" that helps them "transact without borders."

GigaCloud operates 21 warehouses in four countries across North America, Europe, and Asia. That scale enables it to ship most of its large parcel products at lower rates than FedEx or United Parcel Service.

GigaCloud's platform streamlines cross-border sales between manufacturers and sellers, so it ideally shouldn't take on its own inventories. But for now, it still does take on a lot of its own inventories, then sells them again to resellers like Amazon, Walmart, and Wayfair through its first-party marketplace. It generated 78% of its revenue from that lower-margin first-party marketplace last year, but it expects that percentage to decline in the future as it directly connects more manufacturers to overseas sellers.

GigaCloud is based in Hong Kong, but it actually generates most of its revenue in the U.S. It doesn't expect to be targeted by Chinese regulators, since it doesn't operate in a "sensitive" industry, and it plans to switch from its Chinese auditor to an American one to avoid a potential delisting.

How fast is GigaCloud's business growing?

GigaCloud's growth in gross merchandise volume (GMV), active third-party sellers, active buyers, and spend per active buyer all decelerated significantly last year:

Data source: GigaCloud F-1 filing with the Securities and Exchange Commission. YOY = Year over year.

The company attributed that slowdown to challenging year-over-year comparisons to the pandemic, which had temporarily boosted sales of home furnishings as more people stayed indoors. The slowdown was also exacerbated by supply chain constraints and disruptions. As a result, revenue growth cooled off, gross margins contracted, and operating and net profits declined:

Data source: GigaCloud F-1 filing with the Securities and Exchange Commission. YOY = Year over year.

Was GigaCloud's post-IPO rally justified?

At its IPO price, GigaCloud was valued at $493 million. But since the stock nearly quadrupled to $48 per share, the market cap has swollen to nearly $2 billion -- or five times last year's sales.

That would still be a reasonable price-to-sales ratio if GigaCloud can maintain an annual growth rate of 30%-50% with stable margins. But in the first quarter of 2022, its revenue only grew 19% year over year, as rising freight costs reduced its gross margin to just 15%.

If that slowdown continues, GigaCloud could end up in the same boat as Baozun (BZUN -0.32%), another end-to-end e-commerce solutions provider in China that mainly helps overseas brands reach Chinese consumers. Analysts expect Baozun's revenue to rise just 7% this year, and its stock trades at less than 1 times that estimate after plunging 80% over the past two years.

Is it too late to buy GigaCloud's stock?

Unlike AMTD Digital, GigaCloud actually operates a stable business model with irons in the fire. It's also backed by the Chinese e-commerce giant JD.com (JD 1.93%), which owns 12% of the company.

However, GigaCloud's stock has clearly gotten ahead of its business, which remains heavily exposed to high freight costs, supply chain constraints, and trade tensions between the U.S. and China. Simply put, its post-IPO rally was unjustified, and it's too late to chase this high-flying stock.