ChannelAdvisor Stock: Strong Earnings Growth Could Propel Price

ChannelAdvisor-Stock
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ChannelAdvisor Is an Aggressive Play on Internet Marketing Solutions

There has been a lot of focus recently on the power of social media companies and on the idea of some regulation of that power, albeit you have to question this.

A specialized niche of the Internet solutions segment is the development of algorithms that help companies expand and strengthen their online presence.

A small company in this space is ChannelAdvisor Corp (NYSE:ECOM), a provider of a cloud platform used by retailers and brands to grow sales, improve customer service, and gather critical data to formulate strategies.

ChannelAdvisor helps companies with their exposure on many of the world’s leading online portals.

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In all, ChannelAdvisor has worked with nearly 3,000 clients globally to increase their online presence.

There have been some concerns about the possibility of added regulation surrounding the business, but so far nothing major has occurred.

With ECOM stock down 25% from its 52-week high of $15.63 and far off from its euphoric $49.90 in March 2014, I like the favorable risk-to-reward opportunity.

Chart courtesy of StockCharts.com

ChannelAdvisor stock has been retrenching following its 52-week high in June, so the trade is intriguing for risk capital traders.

Why ECOM Stock Looks Favorable

As shown in the table below, ChannelAdvisor has managed to grow its revenues in four consecutive years from $68.0 million in 2013 to $122.5 million in 2017. The compound annual growth rate (CAGR) during this time frame was a sound 15.9%.

Fiscal Year Revenue (Millions) Growth
2013 $68.0
2014 $84.9 24.9%
2015 $100.6 18.5%
2016 $113.2 12.5%
2017 $122.5 8.3%

The stock market may be concerned about ChannelAdvisor’s declining revenue growth rate from 2014 to 2017, but hopefully the company can address this.

For 2018, revenue growth is expected to fall to seven percent (to $131.1 million). For 2019, it’s expected to fall further to 7.1% (to $140.5 million). (Source: “ChannelAdvisor Corporation (ECOM),” Yahoo! Finance, last accessed September 17, 2018.)

ChannelAdvisor has yet to turn a generally accepted accounting principles (GAAP) profit or an adjusted profit, but there was some narrowing in the loss from 2014 to 2016, prior to the company experiencing a sour 2017.

Fiscal Year GAAP Diluted EPS Growth
2013 -$1.51
2014 -$1.40 7.3%
2015 -$0.84 40%
2016 -$0.31 63.1%
2017 -$0.63 -103.2%

In spite of the somewhat moderate revenue growth, ChannelAdvisor has attracted higher earnings revisions, with growth far above the revenue growth rates.

ChannelAdvisor stock is estimated to make an adjusted $0.07 per diluted share in 2018, which would be an improvement over the previous consensus estimate of a loss.

For 2019, ECOM could more than double its profits to $0.17 per diluted share, with a high estimate of $0.33 per diluted share.

In five years, ChannelAdvisor reported one year of positive free cash flow (FCF). However, I expect FCF to return to being positive in 2018, based on the rising earnings.

Fiscal Year Free Cash Flow (Millions)
2013 -$10.5
2014 -$28.4
2015 -$5.7
2016 $9.6
2017 -$5.8

Analyst Take

The strong expected earnings growth could fuel a rise in the price of ECOM stock.

For a small company, ChannelAdvisor has attracted strong institutional investors, with 125 institutions owning about 85% of the outstanding shares.

The valuation of 34 times the high estimate for ChannelAdvisor stock is not cheap, but it’s also not outrageous for a small technology company.