This has been a brutal time for growth stocks. The Nasdaq 100 Index was down over 30% in 2022 with many individual companies down even more. One sector especially hard hit is e-commerce, where investors are faced with slowing growth as economies normalize and the world moves further away from the pandemic.
An extreme version of this happened with e-commerce software provider BigCommerce (BIGC -2.23%). The company opened its first day of trading at $68 per share in Aug. 2020, but it has slowly bled out since with shares down almost 90% from its market debut.
Investors threw in the towel on BigCommerce last year. Does that mean the stock is ready to rebound in 2023?
BigCommerce: E-commerce software for retailers
BigCommerce is similar to Shopify but with a twist. Both companies have a suite of cloud software tools to help organizations more easily sell things online.
But unlike Shopify, which focuses on individuals and small businesses, BigCommerce targets enterprise customers and business-to-business transactions. Some of its customers include popular brands like Ben & Jerry's and S.C. Johnson.
Riding the wave of e-commerce and cloud software, BigCommerce has put up some impressive numbers over the last few years. Last quarter, revenue grew 22% year over year to $72.4 million, driven by a 16% jump in enterprise accounts to 5,560 and a 17% increase in average revenue per enterprise account to $38,885.
Enterprise revenue is growing faster than the company's top line overall due to a slowdown in the self-serve segment, which management has decided to stop investing in. The self-serve segment includes users who sign-up for BigCommerce without a sales rep. Shopify already dominates this slice of the market, and through 2026, BigCommerce thinks it can grow revenue 25% to 30% annually by focusing on large enterprises alone.
The problem: Major profitability concerns
If BigCommerce has impressed with solid revenue growth, it has done so by sacrificing profitability. Operating margins have been negative every quarter since the IPO and have started to trend in the wrong direction in the last earnings reports, hitting negative 33% in the third quarter of 2022.
Through the first nine months of 2022, the company has burned around $90 million in free cash flow. With just over $300 million in cash on the balance sheet, BigCommerce only has a few years left at its current burn rate before it will need a debt or equity raise.
Management is aiming to solve this through its long-term growth plan and expects to hit 10% to 15% adjusted operating margins by 2026. It recently laid off 13% of its workforce, which should help improve margins in 2023.
The problem is that even if BigCommerce hits 10% to 15% adjusted margins, it still might not be providing any value to shareholders. Stock-based compensation, which is not included in adjusted operating margin, was 14.5% of revenue through the first nine months of 2022. Suffice it to say, BigCommerce has a long way to go before it is going to hit sustainable profit margins.
Data by YCharts.
Avoiding BigCommerce is smart for most investors
With the stock down 75% in 2022, you might be tempted to purchase shares of BigCommerce given its long-term revenue goals. At a current market cap of $645 million and with $272 million in trailing-12-month revenue, the stock trades at a price-to-sales ratio (P/S) of 2.4, which is slightly above the S&P 500 market average. For a company expected to grow revenue at 20% or more over the next few years, BigCommerce stock seems cheap at current prices.
But I think investors should avoid buying it right now, no matter how far it continues to fall. The company is so far from profitability and could be structurally unable to generate cash for shareholders without cutting back on its growth targets. There are other much more profitable stocks that you can buy instead during the new year.
