BigCommerce: Ecommerce Still Has A Long Way To Grow (NASDAQ:BIGC)

Description

I recommend buying BigCommerce Holdings, Inc. (NASDAQ:BIGC). The overarching bull thesis is that ecommerce still has a long runway to grow, and within it, BigCommerce still has plenty of opportunities to capture market share.

While I acknowledge that BigCommerce Holdings, Inc.’s short-term growth might be slightly uncertain due to the weak macro environment, we should not discount the future growth prospects. Especially since management has also restructured its plans to achieve profitability earlier than expected, I think it is a good opportunity to start accumulating some shares in BIGC and size up/down as we get more clarity on growth beyond FY23.

Company Overview

BigCommerce Holdings, Inc. offers a SaaS (Software as a Service) platform for cross-channel commerce and cloud-based e-commerce solution that scales with business growth. As most investors should already know what BIGC does, I would not go into detail.

eCommerce Is The Norm

As the popularity of ecommerce grows rapidly around the world, consumers’ habits of making purchases online are also changing. As a result, there is a great deal of pressure on companies to undertake digital transformation using cutting-edge technologies that can keep up with market demands. The most glaring example of this is the fact that over half of the world’s population is now online, with over 5 billion internet users spending time online across a variety of platforms (e.g., ecommerce and social networks). The value of global ecommerce in retail is also projected to grow from $5.2 trillion in 2021 to $8.1 trillion in 2026.

I’m not really surprised by this, to be honest. With the advent of the internet, consumers have access to an unprecedented wealth of resources, opportunities for social interaction, and products. It’s no longer sufficient for brands to use just one advertising medium. Instead, companies should concentrate on the myriad of customer interactions that determine a shopper’s final decision. A few examples are brand website, social networks, SEO, online marketplace. Statistics show that more than two-thirds of e-commerce sales occur in large marketplaces, so these platforms should be seriously considered by brands and retailers. Since most online purchases do not start on the destination site (i.e., a Google search), businesses can’t make the most of their sales potential unless they adopt real omni-channel selling and guarantee smooth, enjoyable experiences for customers at every stage of the buying process.

Legacy Solutions Are Not Effective Enough To Address Sophisticated Industry Change

Traditionally, ecommerce platforms have been managed through conventional methods. Such antiquated practices persist. In my experience, open-source and on-premise software are the most popular e-commerce platforms for well-established SMBs.

When it comes to legacy software, I think ecommerce can be extremely difficult for businesses because it requires a lot of people and skills that aren’t necessarily their strong suit. User experience is crucial to the success of any online store. It can be challenging for businesses to keep up with the evolving expectations of their customers in terms of the quality of their site experiences across devices if they rely on legacy site design tools that are prone to rapid functional and interface decay.

That being said, it’s also crucial to have a solid back-end infrastructure to support the entire ecommerce platform. It is challenging, time-consuming, and expensive to connect and maintain omni-channel sales capabilities across different endpoints and customer touchpoints using legacy solutions. Third-party integration is necessary unless the legacy solution is extremely comprehensive and has very strong offerings. This is especially true for online stores, which even the simplest ones need to integrate with payment, shipping, tax, and accounting processing systems.

Companies that choose to implement or maintain their own legacy ecommerce software face significant challenges due to the aforementioned issues. Most ecommerce companies are organized and staffed to produce and sell goods, making the management and upkeep of their software and technology infrastructure a costly distraction from their core business.

BigCommerce Holdings’ Strategic Approach To Navigating The Industry

Even though BigCommerce’s initial target audience was small and medium-sized businesses, the company has shifted its focus to serve larger businesses. This strikes me as an astute strategic move, given the sizeable share of global GMV represented by this market segment and the improved unit economics it offers over the long haul. BIGC’s trends in ARR mirror this change, showing that enterprise accounts have been taking a larger and larger slice of total ARR. For this reason, I think it’s important for investors to keep an eye on the composition of the company’s subscription revenue. Over the medium to long term, I anticipate continued expansion in Enterprise ARR.

In my opinion, BIGC’s ability to secure contracts with larger retailers stems largely from the platform’s open SaaS architecture, enterprise functionalities and apps, cross-channel capabilities, and robust performance. Within this context, BIGC’s “Headless Commerce” strategy stands out as a major competitive differentiator in its attempt to enter more premium markets. In my opinion, BIGC has made its mark in the world of omnichannel retailing. Through the use of “cross-channel commerce,” a customer’s shopping experience can be unified across multiple channels. The aforementioned “Headless Commerce” strategy is both a rapidly expanding cross-channel niche and a key area of focus for BIGC. What we’re talking about here is connecting the dots between the back end of a commerce platform like BIGC and the front end of a user experience. More importantly, BIGC’s investment in its platform APIs and integration capabilities make it better suited to headless use cases than most of its competitors.

New Restructuring Plan To Bring Forward EBITDA Breakeven Date

BIGC announced a restructuring plan in December 2022 with the goal of bringing forward the company’s breakeven EBITDA date from the middle to late 2024 to the fourth quarter of this year. Management has decided to cut the number of people working on S&M and other non-enterprise projects by 13 percent.

Two additional points merit emphasis. First, since the third quarter earnings call, BIGC has not seen any changes in demand signals and has therefore reaffirmed its fourth quarter guidance. However, management has admitted that cutting the workforce could slow revenue expansion in 2023. Second, BIGC emphasized the development it has made in its enterprise segment this year, which has given it the assurance to refocus on this customer cohort. Notably, BIGC’s CLTV-to-CAC ratio in enterprise is 8:1 compared to 2:1 in its retail segment, and I anticipate this positive mix shift will drive materially better margins over time.

My confidence in BIGC’s long-term potential for market share gains and profitability has been bolstered by the company’s recent restructuring plan and guidance, but I anticipate the stock will be rangebound in the near term due to the lack of clarity into the e-commerce fundamentals beyond 2023.

BigCommerce Holdings Valuation

In FY23, I believe BigCommerce Holdings, Inc. is worth USD $13.47, which translates to 22% upside. My model is based on management 4Q guidance, consensus estimates over the next few years, and the forward valuation that BIGC is trading at today. Investors expectation for BIGC growth has clearly reset post the pandemic when they realized the adoption of ecommerce was not pulled forward as much as they thought. That said, ecommerce is still a major force that is reshaping the world. I believe BIGC is well-positioned to ride on this wave and should continue to grow, albeit with some ups and downs along the way.

Something to note regarding monetization. BIGC does not provide take rates for GMV. To estimate the potential increase in BIGC’s average revenue per user as it expands its monetization efforts, I look to the long-term take rate trends of Shopify (SHOP) Merchant’s Solutions.

Key Risks

Competition in the ecommerce industry is high

BigCommerce Holdings, Inc. faces intense competition in an industry that is only expected to become more cutthroat in the years to come. BIGC’s main rivals in the SMB market are SHOP and SQ. The likes of Salesforce (CRM) and Adobe (ADBE) are among BIGC’s mid-market rivals. BIGC also competes with market leaders like Oracle and SAP in the enterprise sector.

Over-indexed to consumer shopping

Because of stimulus money and the convenience of shopping online, I think the over-indexed to consumer spending has contributed to BIGC’s meteoric rise during covid. However, with inflation at historically high levels today, consumers are increasingly hesitant to spend.

Summary

There is still a lot of room for expansion in the ecommerce sector as a whole, and within that sector, there are many openings for BigCommerce Holdings, Inc. to increase its market share. While I agree that the weak macro environment makes short-term growth uncertain, I do not think we should dismiss the future growth prospects of BigCommerce Holdings, Inc.