Global-e Online (GLBE 1.83%) has been firing on all cylinders lately, delivering a 43% increase in revenue and a 76% jump in adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) in the first nine months of 2023. Similarly, the stock price has increased by more than 70% since the beginning of the year due to its solid financial performance.
While existing investors have been enjoying the ride, potential new investors should not hastily rush into the stock until they consider these two significant risks. Let's review them.
Image source: Getty Images.
Global-e's track record as a public company is relatively short
Global-e has been one of the fastest-growing e-commerce companies, more than tripling its revenue from $136 million in 2020 to $409 million in 2022. It can do so because it helps solve the pain points of companies expanding their cross-border e-commerce businesses, such as logistics, cultural issues, and taxation.
Still, one of my biggest concerns about the company is its short operating record of less than three years as a listed company. The lack of historical data makes it difficult to assess Global-e's long-term performance and the management team's ability to navigate different business cycles.
Moreover, the young company operates in a competitive industry, so there is no guarantee that it can defend its turf, let alone expand it. To this end, its relationship with Shopify helps in certain areas, such as customer acquisition and technical know-how, which could smoothen out Global-e's expansion plan. Still, investors should remember that this is a competitive and dynamic industry, so there's no guarantee that Shopify will always be a friendly partner -- one day it could even become a direct competitor.
On top of that, Global-e remains unprofitable even though it's been expanding rapidly in recent years. This adds another layer of uncertainty to the company since investors have no clue when it will turn profitable. The only caveat here is that Global-e has already achieved positive adjusted EBITDA, offering hope that becoming profitable is the natural next step for the company.
In short, Global-e's short track record makes analyzing it a challenging task. Unfortunately, there is no shortcut here, so investors must be patient and monitor the company's performance over time to make a more informed decision.
NASDAQ: GLBE
Key Data Points
The stock trades at a premium valuation
According to Benjamin Graham, the father of value investing, investors need to have a margin of safety when buying a stock to protect themselves against the inherent uncertainties in the stock market and to reduce the risk of permanent capital loss.
While this principle applies to every stock investment, it is even more relevant when investing in an unprofitable young company with a short track record like Global-e. And herein lies my other primary concern, which is Global-e's high valuation. As of this writing, the stock trades at a price-to-sales (P/S) ratio of 11.4, a considerable premium over Amazon's 2.8.
Considering its vast prospects, it's not unreasonable for Global-e's stock to trade at a premium over Amazon's. For perspective, the young company delivered a gross merchandise value of $839 million in the third quarter of 2023 (annualized at slightly above $4 billion), just a drop in the ocean when compared to the estimated cross-border e-commerce industry size of $736 billion in 2023.
Yet, a massive part of Global-e's valuation lies in its ability to deliver on its growth promises, making its stock extremely vulnerable to changes in investor sentiment. If it fails to meet investors' high expectations, it won't be long before investors re-rate the stock to a lower valuation.
While it's not irrational to pay a premium for Global-e's stock, investors should be cautious of how much of a premium to pay since overpaying might lead to a permanent loss of capital.
What it means for investors
Global-e has been delivering solid growth since going public in 2021, and is well-positioned to ride the cross-border e-commerce industry growth for many years, making it a potential investment candidate.
Still, buying its stock today is not for the faint of heart. Potential investors must be willing to accept the downsides of investing in a young public company. Even at a premium valuation, stock prices could be very volatile.
So, except for the minority willing to endure these significant risks, conservative investors should keep the stock on their radar and act only when they have a better conviction, a lower entry price, or both.
