Why Global-e Is A Buy Right Now

Imagine you are a decision maker in a company looking to sell internationally through an e-commerce website or mobile app.

Think of all the challenges. First, you have to worry about pricing in local currencies. Sure, a product may sell for $20 in your native U.S., but exchange rates fluctuate daily. How can you keep up the relative pricing on your site in euros, or British pounds, or Canadian dollars, or Mexican pesos, or Chinese yuans.... the list is enormous!

You'll also need to be able to communicate with prospective customers in their native languages. Product descriptions, website/app navigation, the checkout process, and customer support all need to work in potentially hundreds of different languages, depending on how wide of an international net you want to cast.

Don't forget payment methods! In the U.S. alone they seem to be proliferating like rabbits... credit cards, digital wallets like PayPal, tech layers like Apple Pay or Google Pay, "buy now pay later" services like Affirm or Klarna, etc. Now take that proliferation and expand it internationally. China has AliPay and TenPay, Brazil has MercadoPago and PagSeguro, Africa has SnapScan and Yoco, India has Paytm and UPI... the list goes on and on, this is just a small sample! How can you support all of these?

Don't forget the various tax collection requirements based not only on country, but often also on region and even city!

And once you do manage to translate your store to the local language, translate your pricing to the local currency, accept all the usual payment methods for the region, and comply with tax laws... how do you actually get your product delivered to the customer?

As you can see, doing e-commerce internationally can be a daunting challenge, particularly for large companies that want to enter as many territories as possible.

Today's company was built to solve these challenges. I think it has a pretty compelling business with a lot of the characteristics we are looking for in a "green dot stock", and it has sat in the Green Screens for some time now. The company is Global-e (GLBE). Let's dig in.

Simplifying The Complexity of Global E-commerce

Global-e was built for one purpose - to simplify the complexity of running a global e-commerce store. Hence the company's name!

Its core offering is a software plugin that integrates into most of the largest e-commerce platforms, including Shopify, Magneto, BigCommerce, WooCommerce, Salesforce Commerce Cloud, and several others. Clients create their e-commerce applications in their domestic language and currency, then utilize Global-e to seamlessly present a localized experience in hundreds of regions around the world. There's no need for manual price conversions, translations, payment provider management, etc... the platform does it all automatically.

As you can imagine, this is a tremendous time saver for its clients!

For use of the platform, Global-e charges a fee for a small percentage of the gross merchandise volume (GMV) sold through the platform. The company calls these "service fees", and they accounted for 44% of revenue in 2022, up from 39% in 2021 and 37% in 2020.

The other service that Global-e provides is international fulfillment. This includes the shipping, handling, and delivery of items all around the world, as well as returns management, collecting duty and excise taxes, etc. The company charges clients for this on a per-shipment or per-return basis. Fulfillment revenues were 56% of total sales in 2022, down from 61% in 2021 and 63% in 2020.

These services clearly provide a lot of value for clients both large and small. Some of Global-e's enterprise clients include multi-national firms such as LVMH, Disney, and Adidas. It has also rapidly pursued the small-to-medium business (SMB) market via a comprehensive partnership with Shopify and its 2021 purchase of Flow Commerce.

The company's outbound client base is suitably diversified. 43% of its business comes from companies domiciled in the U.S., 36% from the U.K., and 19% from the E.U. The U.S. number is up substantially from 29% in 2021, illustrating how much traction Global-e is gaining in the world's largest economy.

Revenue Growth Potential and Recurring Nature

When we look at revenue, we are looking for 2 things. Can it continue growing at a pace well above average (preferably, 10% or better)? And are revenues recurring - that is, do the same customers pay the company over and over again indefinitely?

The answer to both for Global-e is a strong YES.

The company has experienced rapid growth. Its 3-year compound annual growth rate (CAGR) is explosive at 84%. In '22, the company grew revenues at 68%, and 40%+ growth is expected for 2023.

The story is similar for GMV. It ended 2022 at $2.5 billion, which was up 69% from 2021, after growing 55% and 103% in 2021 and 2020, respectively.

It's the GMV potential that is really enticing, as Global-e's platform revenues are basically a percentage of that. The cross-border e-commerce market is expected to reach $1 trillion by 2026, growing at over 25% annually. That puts Global-e's captured market share at less than 0.3%. If it can even get to 1% of this opportunity, we're looking at a 4x increase in GMV which should roughly convert to a similar 4x gain in sales!

I'm not quite bold enough to predict that, but even a 2.5x gain in sales by 2026 - which amounts to about a 33% annual growth rates - seems achievable and would make the stock pretty attractive at current levels.

Whatever the rate ends up being, it is clear that the market opportunity for Global-e is vast and far larger than what they have captured to date.

I also love that this is basically a "toll booth" that extracts a percentage value from every dollar of merchandise sold through its platform. This makes revenue wholly recurring as long as a customer continues to run its international site(s) through Global-e. On this metric, the company is stellar - 98% of its customers continue on the platform year-to-year. That's an outstanding metric for software (a more typical number is 90%, and even lower for SMB-focused firms).

Additionally, Global-e grows its sales as its clients grow theirs. So, a small SMB just starting to sell internationally will pay Global-e more and more as its own business grows. This phenomenon can be seen in the company's 130% net revenue retention rate, meaning that, on average, it is growing sales 30% from existing customers year-over-year.

All of these are great characteristics. Global-e's revenue model is one to envy.

Measuring the Moat

So we like the revenue model and growth potential here, but can the company hold up under what is sure to be growing competition?

I believe it can. We've already mentioned the company's 98% gross and 130% net retention rates. This is a testament to HIGH SWITCHING COSTS. Selling internationally can be a very complex process, but becomes a core business need for merchants. Once they are on-boarded to Global-e's platform, and selling a meaningful amount of volume through it to multiple municipalities, switching away would be extremely risky and time-consuming.

At present, at least, the number of firms that compete on a wide number of services with Global-e is zero. Over the past couple years, Global-e has bought up its two primary competitors, Flow Commerce and Borderfree. That makes it the only firm doing full service internationalized e-commerce. Its main competition are larger firms that "roll their own" international websites/apps, certain services provided by payment providers like Stripe or Adyen, and native integrations from e-commerce platforms.

That's not to say new competition won't enter the market. There is big revenue potential in this space, and barriers to entry are not particularly high. But by nature of its early mover status, consolidator mentality, and sticky service, Global-e has a big lead and should be able to fight off any prospective competition for the foreseeable future.

Management and Financials

There isn't much to complain about with the management team. Global-e was co-founded by 3 Israeli men: Amir Schlachet, Shah Tamari, and Nir Debbi. Today, all 3 of them retain positions of leadership in the firm. Schlachet is CEO, Tamari is COO, and Debbi is President. Each of them hold identical 3.5% stakes in the company, which are worth $160 million a piece, at present.

Founder leadership is one of the things I find most attractive in potential investments. Founders are more likely to have and drive towards a vision instead of chasing short-term profits at the expense of long-term company health. The most successful companies of any given 20 year period have almost always been founder-led. That's what we have here.

Global-e's tremendous growth has been achieved by this leadership team. The company was brought public under their watch. And its financial strength is another indication of strong leadership. Global-e remains debt-free, generates free cash flow at margins nearing 20% of revenue, and despite two fairly large acquisitions, cash returns on invested capital remain decent at 10%.

Risks

This investment is not without risks, and Global-e should be considered "medium-high" risk compared to our other portfolio stocks.

The first one I'd mention is simply potential competition. Global-e is increasingly integrating with Shopify, which is the leading e-commerce platform, but it also creates the risk of alienating competing offerings and driving them to create or search out their own internationalization partners. That may not matter if Global-e remains best in class, but tying its own fortunes to Shopify has both benefits and risks.

Second, Global-e has used acquisitions to drive some of its growth. We generally prefer to see organic growth. I'm not overly concerned about this to date. Flow Commerce and Borderfree were both direct competitors and very good fits. What we don't want to see, though, is Global-e making large acquisitions on a regular basis, particularly ones that "expand the business" into non-core areas.

Finally, while the stock's valuation has come down quite a bit over the past few years, this is still a company priced for growth. If Global-e falls short of 30% annual growth over the next few years, the current price will prove to be overvalued. While most see growth far outpacing that, it is a high bar and there is no guarantee of it being cleared.

Conclusion

Global-e has got the goodies we are looking for: big revenue growth potential, recurring sales, competitive protections in the form of high switching costs, a founder-led management team, and strong financial metrics. It makes the cut as a "green dot stock".

Looking to valuation, assuming about 33% annual growth over the next 5 years, combined with substantial share dilution (6% annually), and a higher-than-par 11.5% discount rate, I think Global-e could conservatively be worth $37/share. This isn't far off the $38 price target the analyst community has on it. With a current share price under $27, that represents 29% upside and makes Global-e a buy right now. It gets added to the Buy List today!