isitsharp/iStock via Getty Images GigaCloud Technology Inc. (NASDAQ:GCT) is a name that we have highlighted at both our Investing Group and here on the public site as having substantial long-term upside with its impressive growth rate, as well as a really reasonable valuation. Now, after the stock skyrocketed we highlighted it publicly, but we guided our members to expect a down draft and accumulate heavily sub $30. Shares dropped to the mid-low $20s, only to bounce back to the high $30s for a nice trade, but we see a potential double here so long as the growth path continues. Simply put, the GCT valuation suggests the Street has questions. Make no mistake, the company has been attacked by a number of short reports of late, of which our colleagues have covered publicly here on Seeking Alpha. That 17% short interest has helped keep the stock pinned down, but the shorts made the easy money. It is our view that unless the company and its filings are a complete fabrication, so long as management continues to execute the way they have been, the stock offers sizable upside on valuation and growth combinations alone. You see, there is a misperception that this is some sort of overpriced furniture company. That is an elementary and simplistic view. This company actually runs a business-to-business technology platform, the so-called GigaCloud Marketplace, which connects suppliers and resellers worldwide. Now there is some risk in that plenty of business stems mainly from Asia (specifically China) and the rest of the world, with the outside Asia focus being in the US. Now we will not dig into the short reports here, it has been done, and commented on heavily on other columns from colleagues. The main question is whether the customer list has been doctored by including customers that are simply shell companies. That is one of the most scathing accusations to which the company responded. This, we think, is worth mentioning. Management stated: “The short-seller report lacks merit and contains numerous defamatory, selective, inaccurate, incomplete and misleading statements, speculation, and innuendo….. The report demonstrates a fundamental lack of understanding of the Company’s business, particularly with respect to the types of buyers who use our marketplace. This is why we assert that unless the customers and the financials are a complete fabrication, savvy traders should consider a position here in the $20’s for the next squeeze higher. The next catalyst could be a company announcement, or more likely the next quarterly earnings. The growth numbers have been solid, and the execution is clear. Seeking Alpha’s quant ratings, which historically pick decent winners, though not always, show very favorable quants. We believe that the fundamentals, coupled with a 17% short interest, set the stock up for another run on earnings which we expect will be positive. Further, the company has some competitive advantages in our opinion. They have strong logistics and their platform allows for swift cross-border transactions on its marketplace. Currently, there are nearly three dozen large-scale warehouses globally within the range of seven international destination ports. We expect to see the annual containers they move increase over time toward 20,000. Moreover, they have ground shipping and a trucking network. The attraction here is they can move orders to customers in-house for cheaper than using third-party shippers (think FedEx types). How is performance since our last check-in? Well, in our opinion, this is a very high-growth story, and as we alluded to before, for the growth, it’s pretty undervalued overall. The growth in our opinion justifies an expansion in valuation. The Street, perhaps influenced by heavy short interest, may be pinning the valuation lower as it anticipates some sort of slowdown. But for now, there are really no signs of such a major slowdown. Perhaps some risk from the short report accusations are contributing to pinning the stock lower. However, one of the catalysts for more growth, which we expect to see reflected in future earnings reports, was their overhaul of the entire business model to simplify operations. The business model shift now streamlines the supply chain by bringing end-to-end services in-house, including order fulfillment in-house, and managing the process of shipping from factories directly to customers. We expect lower cross-border shipping complexity, lower costs, reduced errors, and fewer delays over time. Thus, this should lead to an improvement in GigaCloud’s efficiency and profit margins. However, the transition is ongoing, and recent acquisitions help plug any pitfalls in the approach. As of now, the long-term impact remains to be seen, but a simplified operation suggests financial improvements are likely to continue. This was evidenced by the recently reported earnings. The stock has not recovered since this report, and then was hit with the latest short attack in May. But by all accounts, the performance was incredible. Now, we mentioned this was a strong growth stock. Here is some direct evidence. Again, barring complete fabrication, it is difficult to justify the stock being stuck here, with the aforementioned reasons notwithstanding. Perhaps most notably? How about the fact that in the quarter total revenues were $251.1 million, surging 96.5% from $127.7 million in Q1 2023. Now, it was largely expected to be a huge year-over-year improvement, but this also surpassed analyst estimates by $8 million. Not only did sales ramp up, but there was notable margin improvement that led to better gross profit. Gross profit was $66.5 million, a massive 124.7% increase from $29.6 million in Q1 2023. Further, gross margin increased to 26.5%, a 340 basis point improvement from 23.1% in Q1 2023. There is no other way to characterize this other than it being outstanding growth. This clear growth in revenue and profit margin led to substantial gains in earnings metrics as well. Adjusted EBITDA was $34.5 million, jumping 74.2% from $19.8 million a year ago. And unlike many other high growth, complex b2b, and/or tech companies, this company makes a tidy profit. Net income was $27.2 million in the quarter, ramping 71.1% from a year ago. This translated to an adjusted EPS of $0.84, which beat estimates by a whopping $0.33. As we look ahead, we think this consolidation is setting the stock up for a major move, and we believe that move will be higher. We expect this stock can continue rising, as this growth, in our opinion, justifies an expansion in the valuation metrics here. For Q2 2024, management expects its total revenues to be between $265 million and $280 million. The consensus is $276 million, so there is some risk here in that all of these huge revenue beats may be coming to an end. That is possible and that is a risk. But thus far, the company continues to over-deliver. And another quarter of outperformance is likely to trigger a squeeze. Assuming margins of 26-28%, with commensurate expenses from Q1 2024, adjusted EPS is likely to come in at $0.66 to $0.76. This would be some 60% growth, and if revenues hit even the high end of guidance this is about 83% growth. Now it is our thesis that exceeding expectations will trigger a squeeze forcing covering. But some risks here include shorts circling the wagon and upping their shorts to press their bets. That is possible. Further, underperformance could cause speculative traders to bail, triggering stop losses on the way down. That is a risk. There is still some risk that short report accusations have merit. We do not see the numbers and customers as being fabricated, however. Another thing to point out is that with such magnificent growth, the forward year-over-year comps will be tougher to lap, so the relative percentage gains in revenue, EBITDA, and EPS growth will start to come down, even if it is strong growth. Hence, bears may hone in on “decelerating” growth rate, but realistically, how long can companies continue to put up doubles year after year? What does not jibe with the clear growth is the lackluster valuation. The stock is discounted, likely due to all the aforementioned risks, in addition to risks mentioned in our colleagues’ articles. However, we view the risk-reward here as very favorable in the $20s. The risk of a squeeze is high, especially if management continues to execute and post dazzling numbers with favorable guidance. We think this is a level to hold your nose and buy GigaCloud Technology Inc. shares.
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