Yahoo Finance
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Sept 23, 2024
Q2 2024 Data
Price: $1.43, Shares: 35m, Cap: $50m.
Summary
(1) A fast-growing Amazon third-party seller has experienced a hiccup in profitability in the last 2 years. It is expected to continue to grow its revenue significantly in the next several years.
(2) Profitability has recovered in the last two quarters. It is more than likely that it can maintain a similar profit level or even better going forward. The stock is traded around 10 P/E based on the current profit projection.
(3) The very limited public float(1.75m shares) number makes the stock only suitable for small investors.
Business
(1) History
(1) History
The company was founded by Sam Lai(赖勇全) in 2013. By then, he was still an Amazon engineer. It was created for him to gain some knowledge of Amazon selling. Surprisingly, the business did very well and by 2016 it had achieved $7m in revenue. In 2017, he quit his Amazon job and solely worked on the business. It grew very fast to $24m in revenue in 2019. It self-funded all of its growth with almost no capital injection.
In 2020 and 2021, benefited from the Covid lockdown, the business achieved a great result both on the top line and the bottom line. It made around $8m in net profit in these two years.
In early 2022, the company did a traditional IPO and listed on Nasdaq. It raised a modest $6m dollars at $4/share.
In late 2021, severe supply chain issues caused the company not to have enough inventory to sell. In 2022, the supply chain issue is still there. The company built a very high inventory in the first 3Q preparing the holiday season. However, many Amazon sellers did the same thing, and the sales in Q4 were not as good as expected, the company's margin compressed by 7% vs the previous year. At the same time, Amazon hiked its FBA(Filled by Amazon) fees significantly. Also, it incurred higher costs as a public company. It swung to $2m in losses in 2022.
The situation lasted all through 2023. Compared to 2021, its margin is almost 5% lower in 2022 and 2023, and its selling expense is almost 5% higher. Its losses widen a little bit in 2023.
However, by the end of 2023, it was able to reduce its inventory to a much lower level. Also, Amazon's FBA price went down a little bit. In the first 2Q of 2024, the company's margin improved significantly although its selling expense is still quite high. It generated around $2m in real income for the first half.
(2) Product & Services
1. Products
The company's major categories are home decor and toys. Many of those items are quite unique and around $20 to $30.
Currently, it manages around 100k SKU's.
Vendor number: 2020: 226. 2021: 300? 2022: >700. 2023 +150?
2. Revenue and gross margin
Shipping goods from the manufacturer to its warehouse is included in the cost of goods. Also, the estimated return is deducted from total revenue.
3. Selling and Marketing Expenses
It is pretty sure that all the fees the company paid to Amazon are included in the selling and marketing expenses which range from 38% to 47% in the last 3 years. I am not sure whether the customer support cost is included there. Currently, the selling and marketing expenses are still quite high.
(3) Industry
Amazon's Total Seller Fees
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"According to P&Ls provided by a sample of sellers selling on Amazon.com and using FBA, a typical Amazon seller pays a 15% transaction fee (Amazon calls it a referral fee), 20-35% in Fulfillment by Amazon fees (including storage and other fees), and up to 15% for advertising and promotions on Amazon."
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Competitors:
There are 3 different big Amazon marketplace sellers:
a) Amazon Retail: The products that are sold by Amazon itself. Usually, Amazon offers the lowest prices which makes it hard to compete against.
b) Private label sellers: they sell their own products and HOUR doesn't compete with them.
c) Third-party sellers: they are direct competitors of HOUR. However, among the top 20 sellers, they all focus on different niche product categories. No seller sells in the same decor and toy categories. However, some sellers do overlap HOUR's categories.
(4) Seasonality
Based on the last several years, the last quarter of the year accounts for up to 50% of its annual sales. However, in Q4 the SG&A expense is also much higher. Thus its profit in Q4 might just be a little better than the other 3 quarters. The first 3 quarters are at a more similar lower level.
(5)Employees
178 at the end of 2023.
2. Management
(1) Management
Sam Lai: CEO. He worked for Aamzon for many years as a developer before 2017. His bonus compensation is tied to the profit the company achieves in a given year.
Maggie Yu: SVP. She is Lai's wife who is also a computer graduate. Her bonus compensation is tied to how many vendors the company acquires in a given year.
(2) Ownership and Compensation
Sam Lai & his wife own around 33 million shares. Around 95%. Each of them has a compensation of around $0.5m + bonus.
3. Financial data
Notes: debt
Debt: At the end of Q2 2024, it has 3.3m in cash and 2.9 m+4.2 m in debt. The 4.2m was provided by Lai and his wife. Originally they were the distributions from the company to them at the time of the IPO. They lent them back to the company for free. Now they carries around 3% in interest.
Notes: Share Data
In 2023, 35m shares are outstanding. Only around 1.75m are in public float.
4. Valuation and comments
(1) The company generated tremendous growth since the beginning. Its revenue still growing at a very fast pace. On the other hand, it didn't generate much profit except during the first 2 years of the pandemic. Still, it is very impressive that all of the growth was almost fully self-funded.
(1) The company generated tremendous growth since the beginning. Its revenue still growing at a very fast pace. On the other hand, it didn't generate much profit except during the first 2 years of the pandemic. Still, it is very impressive that all of the growth was almost fully self-funded.
(2) I view the 2022 and 2023 hiccups are related to over-stocking and supply chain issues. Going forward, it is unlikely to experience those same issues again.
(3) The company should be able to achieve at least 5% in net income as it scales up and becomes more efficient. Currently, it is traded less than 10 times normalized earnings which is very cheap given the high growth rate it achieved.
(4) The public float is too few for it to actually be a public company. I don't really understand the management's intentions here. Wish it could issue more shares or release some of their own shares.
5. Risk
(1) It is in the retail business which means the macro economy will affect its business quite a lot. Overall, since most of the products it sells are low price items, it won't be as bad as those consumer durables or luxury house items.
(2) Its revenue is almost all from the Amazon US site. Obviously, if something happens on Amazon, it will greatly affect its business. However, it is a very low probability that its business will suffer a hard stop. A more reasonable scenario is that Amaozon's policy or price change will affect its profitability. This had happened during the 2021 to 2022 supply chain shortage period.
(3) The competition on Amazon is always tough. If some competitor decided to compete directly in HOUR's category, it could lose its competitive advantage and become less profitable or even lose money.
(4) Generally the CEO family's interest is aligned with shareholders. However, since the public float is too low, the share price doesn't really matters to them. Also, he is more of an engineer than a CEO.
6. Conclusion
This company is unique with high growth potential and very low public float. The price is very cheap and it is good for small investors. The business might be cyclical and it solely relies on a single platform. Should be watched closely.
7. Links
