Sector financial performance:

This company, who primarily sells, by itself and through its website, general merchandise products and as well provides marketplace for third sellers and internet related services, has been grouped into online retail& service sector in merchandise store industry.

Almost all companies in this sector in our analysis have experienced fast growth in terms of direct products sales between 2015 and first half of 2017 (double digits growth rate) as reflected from the increased sales volumes. This can be attributed to the lower purchasing costs (price/shipping) in North America or strong natural demands in China. Correspondingly, the service revenue of some of companies where apply increased as well as the sales of third-party seller who use their marketplace increased quickly.

Products sales of most companies in this sector grew slowly or decreased in 2017 in US market and some rebounded back on the track of 2015/16 in 2018. The slowing growth of 2017 in direct products sales of many companies in China market seems to be continuing after entering 2018 and presents a more clearly downward growth trend since 2015for those China-based companies probably due to increasing pressure on price resulted from competition.

Direct sales gross margins (merchandise margin) of companies that focus on US market decreased significantly probably due to the lower price and shipping costs. Benefiting from economy scales and getting better of retail market and from leverage of other expenses such as fulfillment as a result of fast increase in revenue from service, some of US companies have been seeing the improved operating margin and cash flow. However, in China market, due to increasingly intensive competition, most of companies experienced shrinking margins and decrease in cash flow as compared with 2016.

The current average gross margin (direct sales gross margin) is about 15% with a range in 5-28% down from about 17% three years ago. The current average gross margin (products and service) is about 23% with a range in 7-36% up from about 17% three years ago(fulfillment expenses included). At the same time, as companies continued to increase investments in selling& marketing and technology innovation when facing intensive competition since 2017, the average SG&A as percentage of sales (currently average 18.5% with a range 6-32%) and average technology& content as percentage of sales (currently average 5% with a range of 2-13%) got worse in 2018. Therefore, under the help from improved gross margin, the average operating margin firstly went up above 0% from -3% in 2017 (12 months trailing data) and down back to -1% in 2018.

According to our analysis, the current companies’ enterprise price/EBI ratios vary from 100 to 200 and enterprise price/sales ratios vary between 0.4 and 4.5.

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Company performance:

The net sales have kept going up quickly in the past several years (with an annual growth rate of over 25%) primarily as a result of increase in sale volume as a result of reduced shipping costs and increased selection. Growth in sale volume has accelerated since the second half of 2017 as indicated by the sales increase of about 38% in 2018 as compared with the first half of 2017 of 28%.  Revenue from AWS service increased quickly as well (with an annual growth rate of more than 40%).

The first six months of fiscal 2018 compared with same period of 2017

Organic net sales increased about 38% (37% for 2Q) primarily due to increase in unit sales as a result of lower price/shipping costs, high inventory availability, and increased selection, and increase of 49% (49% for 2Q) in AWS services.

The fiscal 2017 compared with 2016

Organic net sales increased about 31% primarily due to increase in unit sales as a result of lower price/shipping costs, high inventory availability, and increased selection, and increase of 43% in AWS services.

The first nine months of fiscal 2017 compared with the same period of 2016

Organic net sales increased about 28% primarily due to increase in unit sales as a result of lower price/shipping costs, high inventory availability, and increased selection, and increase of 42% in AWS services.

Fiscal 2016 compared with 2015

Organic net sales increased about 28% primarily due to increase in units sales as a result of lower price/purchasing costs, high inventory availability, and increased selection, and increase of 55% in AWS services.

Fiscal 2015 compared with 2014

Organic net sales increased about 26% primarily due to increase in units sales as a result of lower price/purchasing costs, high inventory availability, and increased selection, and increase of 70% in AWS services.

Its gross margin of products sold by itself (excluding fulfillment costs) has decreased significantly by about 500 basis points since 2014 to about 5% of fiscal 2017(trailing 12 months) as a result of lowering costs for customers including reducing price/shipping costs. However, while gross margin of products sold decreased and all other expenses as percentage of sales improved (the fulfillment - 160 basis points to 13.5%, SG&A- 120 basis points to 8%, and technology and content- 250 basis points to 13%), this company’s operating margin still gained increase to about 2% from 0.3% of 2014 because of the faster increase in revenue from marketplace and AWS services. Merchandise margin continued to be lower in 2018 (3.4% from 5%) as company continued to lower shipping costs and price probably. However due to leverage of other expenses as a result of fast increase in sales, we see that operating margin was improved to 3.5% in 2018 as compared with 2% a year and half ago. Cash slow has been increasing quickly in the past three years presenting a compounding annual growth rate of 50%.

Stock price

This stock currently has an enterprise price/EBI ratio is 199 ($1908) and stock price/cash flow ratio of 232. We think that its stock is being relatively undervalued considering the fast growth in earning and its potentials while concerned with 1. Intensive the competition makes the space limited in making more profits from its direct products sales. 2. For the potential segment in marketplace and AWS, while they are providing larger margin the cash flow from this segment and prediction of the cash flow is uncertain.