One of the hottest stocks on Wall Street has been GigaCloud Technology (GCT 2.19%), which was up 470% in the year ending May 23. However, the stock's meteoric rise has also led to scrutiny of the company among investors.
The stock has about 9% of its shares sold short, and has been the subject of two recent scathing reports from short-sellers. Note that short-sellers make money when the stock they are short on goes down. Below is a look at why the stock has been on a tear and some potential red flags.
NASDAQ: GCT
Key Data Points
Fast-growing and cheap
Investor interest in GigaCloud's stock lies largely in the company's growth. It grew revenue 44% in 2023 to $704 million, while its net income surged nearly 300% to $94 million and its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) nearly tripled to $118 million.
Meanwhile, 2024 has started even better for the company, with revenue soaring nearly 97% to $251 million in the first quarter. Its net income jumped 71% to $27 million, while adjusted EBITDA climbed 74% to $34.5 million.
On top of that, the stock looks dirt cheap, given the type of revenue growth the company has been generating. The stock only trades at 11.6x on a forward price-to-earnings (P/E) basis and under 7x on an enterprise value (EV)-to-EBITDA basis. The latter metric takes into consideration the company's net cash position and removes any non-cash expenses, such as depreciation and amortization and stock-based compensation.
GCT P/E Ratio (Forward) data by YCharts.
Given the company's huge revenue growth and inexpensive valuation, it's not a surprise that the stock has been attracting investors.
Red flags
That said, there are a number of red flags to consider when looking at GigaCloud Technology. The first is the name, GigaCloud Technology, which invokes the thought of a company on the leading edge of cloud computing or artificial intelligence (AI). However, that's not remotely close to what the company does.
GigaCloud runs a logistics and business-to-business (B2B) marketplace for large parcel products, mainly furniture. It connects Asian manufacturers to buyers in the U.S., Europe, and other parts of Asia. However, even this description doesn't paint a full picture of what the company does, as nearly three-quarters of its revenue comes from product sales. It sells its inventory through its own website or third-party websites such as Amazon, Wayfair, and Home Depot, among others.
In reality, GigaCloud Technology is largely an online retailer of inexpensive Chinese furniture.
The revenue growth is still there, but comes at an interesting time. The furniture and home furnishings industry has been one of the most difficult segments of retail, as the pandemic caused a lot of demand for furniture to be pulled forward. According to the Commerce Department, home furniture and furnishing sales were down 4.7% in 2023 and 9% lower through the first four months of this year.
When the entire furniture industry is struggling, how is GigaCloud's revenue surging?
Image source: Getty Images.
It perhaps isn't surprising that GigaCloud's success has drawn the scrutiny of short-sellers; the company was the subject of two negative reports. First, in September, Culver Research came out with a report that said (among other things) that the company had an unusually low number of employees (73), given it runs 14 warehouses, and has only five registered vehicles for its last-mile delivery service. This is despite claims it only uses its own vehicles.
More recently, in May, Grizzly Research came out with another short report on the company. The research analysts there claim that GigaCloud's B2B website traffic doesn't correlate to the growth of the company. GigaCloud has denied these allegations.
Short-sellers often get a bad rap in the investment community because investors believe they're betting against them. However, short-selling plays an important role in the market and can uncover fraud.
Like long-term investors, short investors can be right or wrong in their analysis. At the end of the day, they want the stock to move in a certain direction, so there's a certain narrative they're looking to tell to move a stock in that direction, but that doesn't mean they can't be correct.
Is it time to buy or avoid GigaCloud stock?
At this time, I'd avoid GigaCloud stock. The company is growing quickly and the stock is cheap. However, there are a number of red flags, and it's somewhat confounding how it could be growing so quickly when the industry is performing so poorly. It's just not common for a company to completely buck industry trends, especially selling undifferentiated products.
At the end of the day, there are more interesting stocks with less controversy to invest in at the moment.
