EMERGE Commerce has a huge upside, says Raymond James

eCommerce acquirer EMERGE Commerce (EMERGE Commerce Stock Quote, Chart, News, Analysts, Financials TSXV:ECOM) has had a rough couple of months, but the stock should rebound, according to Raymond James analyst Steven Li, who initiated coverage of ECOM on March 11, saying the company has a wide M&A pipeline of opportunities.

EMERGE Commerce, which went public through a reverse takeover transaction this past December, is an acquirer and operator of e-commerce brands across North America, with offerings in categories such as golf, groceries, essentials, nearby staycations and experiences. Emerge focuses on companies in niche verticals and currently has e-commerce sites such as UnderPar.com, WagJag.com, JustGolfStuff.ca and BeRightBack.ca.

At the end of December, EMERGE acquired truLOCAL, a market leader in direct-to-consumer, premium meat subscriptions, a company that generated positive EBITDA in calendar 2020 and revenue growth that went from an unaudited $1.4 million in 2018 to $19.8 million in calendar 2020.

Commenting on truLOCAL and EMERGE’s acquisition pipeline in a January update, Emerge CEO and founder Ghassan Halazon said EMERGE currently has over 40 target e-commerce companies after having completed five acquisitions to date.

“TruLOCAL was able to scale its operations with approximately $1 million in total equity invested until its acquisition by EMERGE,” said Halazon. “This is a testament to the rare breed of disciplined profitable e-commerce startups that EMERGE stands firmly behind and continues to partner with.”

ECOM hit the ground running as a public company, its share price going from $0.82 to $1.62 in the space of a couple of months. But the stretch from mid-February until now has been mostly downhill, with the stock currently in the $1.00-$1.10 range.

Li thinks there’s upside to be had. The analyst initiated coverage of ECOM with an “Outperform 2” rating and a 12-month target of $2.75, which at the time of publication represented a projected return of 113 per cent.

“The global e-commerce market is seeing unprecedented growth,” Li said in his report. “But even as e-commerce SMBs benefit from this surge, many find themselves unable to scale (due to a lack of capital). This has led to the emergence of a new group of e-commerce acquirers. Very few are public companies (although that can quickly change). With a seasoned M&A team and the recent upsized $11.9 million private placement, EMERGE looks poised to convert on its $35+ million EBITDA M&A pipeline.”

Li pointed to the fact that the global retail e-commerce industry had sales of US$4.3 trillion in 2020, with the COVID-19 pandemic accelerating the trend towards online business. Li relayed that at the height of the pandemic in the first quarter 2020, global e-commerce experienced ten years of normalized growth in just 90 days.

“This e-commerce surge obviously translates well for Emerge’s portfolio of companies, which have seen similar strength in organic growth. truLOCAL revenues have grown at a CAGR of +136 per cent year-over-year for the past three years. With the average order value per month per customer staying fairly constant, member growth has been increasing at a similar clip. Management also indicates that margins have increased steadily over this time from 30 to 35 per cent,” Li wrote.

On the type of company Emerge pursues, Li said while e-commerce SMBs are benefitting from the transition to online shopping, many aren’t getting the capital resources to scale their businesses, with this being especially true for companies in the $1-$5 million EBITDA space. That phenomenon has led to the emergence of companies like Emerge growing through acquiring and enabling such smaller ‘Fulfillment by Amazon’ companies.

“Emerge tends to place a higher multiple on acquisitions made. We believe this speaks to the size and quality differences of the assets acquired. Amazon acquirers are buying smaller and riskier companies with an average of $1.0-$2.0 million of revenue and $0.5-$1.0 million of EBITDA,” Li wrote.

“The vast majority of these Amazon acquirers go after smaller FBA Amazon shops that do not have their own proprietary tech (most of them are building on top of the Amazon environment). As such, there is always the risk of being entirely dependent on the Amazon ecosystem, which can change at any time. Emerge, on the other hand, tends to go after larger quality assets that are not subject to the same level of platform risks,” Li said.

Along with having an established management with a pedigree in M&A, Li said EMERGE’s ‘founder friendly’ approach to acquisition is commendable, with the company typically offering a “very fair” multiple of 4x-6x EBITDA, representing a premium to some of the smaller deals done by other similar Amazon acquirers.

“The typical acquisition is structured with the majority of the payment upfront (50 per cent) cash. Shares make up ~20 per cent of the consideration and this becomes a strong selling point as ECOM executes successfully on its growth strategy, allowing founders of these acquired companies to participate in the potential upside of a public company,” Li wrote.

On its financials, Emerge reported its third quarter 2020 results in mid-December, 2020, with revenues of $2.2 million (up 196 per cent year-over-year) and adjusted EBITDA of $0.1 million. For the upcoming fourth quarter results, Li is forecasting revenue of $2.2 million and EBITDA of $0.1 million. Longer-term, Li thinks Emerge will hit $33.4 million in total for 2021 revenue and $38.4 million in revenue for 2022. On EBITDA, he is calling for $1.4 million in 2021 and $2.0 million in 2022.