Newegg Commerce NasdaqCM:NEGG Stock Report

Newegg: Revenue Growth Supported By GMV Growth

We determined that the company's revenue growth decline in 2018 and 2019 was mainly driven by its decline in active customers during the period from 4 mln to 3.2 mln. We believe this is attributable to factors including the tax crackdown on customers, credit card data breaches, and counterfeit goods which may affect future growth. However, we still projected the company's revenue growth at a 3-year forward average of 16.5% driven by rising AOV and as the company's NPS score improved. Newegg Commerce, Inc (NEGG) is a US e-commerce company that focuses on electronics. The company operates both B2B and B2C platforms. We analyzed the company as its revenue growth had declined by 24.2% from FY2018 to FY2019 to identify the reasons for this decline and determined if these factors could impact its future revenue growth. Revenue Recovering From 2019 Low Newegg 2017 2018 2019 2020 2021 Total visits ('mln') 263.3 261.6 262.20 382.20 305.10 Growth % -0.6% 0.2% 45.8% -20.2% Number of active customers ('mln') 4 3.9 3.2 4.7 3.5 Growth % -2.5% -17.9% 46.9% -25.5% Gross Merchandise Value (GMV) ($ bln) 2.5 2.4 1.9 2.7 3 Growth % -4.0% -20.8% 42.1% 11.1% GMV per active customer 625.00 615.38 593.75 574.47 857.14 Growth % -1.5% -3.5% -3.2% 49.2% Average Order Value ($) 286 299 310 301 442 Growth % 4.5% 3.7% -2.9% 46.8% Take Rate 86.32% 84.27% 80.73% 78.33% 79.21% Growth % -2.4% -4.2% -3.0% 1.1% Conversion rate 3.4% 3.2% 2.4% 2.4% 2.3% Revenue ($ mln) 2,158 2,022 1,534 2,115 2,376 Growth % -6.3% -24.2% 37.9% 12.4% Source: Newegg, Khaveen Investments We analyzed the company's customers based on the total visits, number of active customers, average order value and conversion rate to identify the reason for the revenue decline from 2018 to 2019. Based on the table above, the company's revenue and GMV had positive growth in the past two years (2020 and 2021) which was an improvement compared to its negative growth in 2018 and 2019. GMV is calculated from the total number of active customers & GMV per active customer. Moreover, the company's total visits grew in the past 5 years which is in contrast to its active customers which declined, indicating that the company is not able to capture visits and convert them to sales. This is also witnessed by its decreasing conversion rate from 3.4% in 2017 to 2.3% in 2021. Furthermore, in 2021, we believe that the revenue growth was mainly driven by the increase in AOV (46.8%) which drove the growth in GMV per active customer at 49.2%. Thus, based on our analysis, all metrics showed an increase from 2018 to 2019 except for the number of active customers and GMV. Hence, we believe that the reason for its revenue decline is due to the decline in its active customers resulting in its GMV decreasing. Long-term Revenue Growth Supported by AOV Growth Based on our point above, we determined the company revenue growth in 2018 and 2019 was affected driven by the decline in active customers. We examined the potential factors to explain the decline in active customers. Below are the events we believe that had contributed to the decline in active customers in 2018 and 2019: Tax Bills: In March 2018, Newegg customers in Connecticut were affected by the tax crackdown. Newegg had shared the past purchase records of its customers with the Department of Revenue Services ('DRS') which went after customers on the sales tax issue. Credit Card Hacking: In September 2018, for one month period, Newegg had a data breach involving customers' credit card info. Some customers' info may have been stolen and Newegg responded to the issue by sending emails to its customers. Counterfeited Goods: In April 2019, a study by the Government Accountability Office found that 40% of commonly counterfeited products were fake on websites including Amazon (AMZN), Sears, Walmart (WMT), eBay (EBAY) and Newegg We believe that all these events cumulatively affected consumer trust and affect the growth of Newegg's active customers in 2018 and 2019. However, we believe that the tax issue would not continue to affect the company's revenue growth as it was only in one state and is a one-off event. That said, we believe there could still be counterfeit goods reportedly sold on Newegg hence this may affect the company's future revenue and we could not find any measures Newegg had implemented to prevent future security breaches. Hence, we believe that these two events may happen again in the future and affect Newegg's revenue growth.