After a 250% increase in stock price in just one month, when will Newegg resolve its internal and external troubles?

On December 1, 2023, the stock price of Newegg (NEGG.US) reached a high of $1.82, with a staggering increase of 44.4%. This was not just a temporary market trend. A month ago, the stock price of this North American e-commerce platform company hit a new low of $0.52. However, the stock price of Newegg continued to rise, reaching $1.82 within a month, with a monthly increase of 250%.

Although the stock price of Newegg has since fallen back, the disclosure of the Q3 2023 financial report seems to have injected adrenaline into the stock price. However, both from a financial and business perspective, Newegg's performance is not impressive.

According to Zhitong App, on December 22, after the market closed, Newegg announced its 9-month performance ending on September 30, 2023. After the financial report was released, the stock price of Newegg achieved a 4-day consecutive increase in the following trading days. However, the Q3 financial report data seems insufficient to support such positive market feedback.

The financial report shows that the GMV of Newegg for the 9 months ending on September 30, 2023 was $1.265 billion, a decrease of 20.2% compared to the same period last year. As a result, the company's current sales also dropped to $1.041 billion, a decrease of 16% compared to the same period last year.

At the same time, the company's current gross profit was $118 million, a decrease of 24.7% compared to the same period last year. The adjusted EBITDA for the same period also decreased to a negative $17 million, compared to a negative $4.5 million in the same period last year. The company's net loss was $44 million, further widening from a net loss of $27.4 million in the same period last year.

In terms of operational data, Newegg currently has an average inventory turnover rate of 40 days, and the total inventory level decreased from $156 million at the end of 2022 to $142 million at the end of September 2023.

As an e-commerce company, Newegg focuses on selling electronic products, including computer hardware, software, peripherals, and consumer electronics products, to consumers and small and medium-sized enterprises. Its platform business includes direct sales and third-party marketplace businesses. In fact, Newegg was originally the second largest e-commerce company in the United States, but in 2016, it was acquired by the domestic A-share listed company Liaison Interactive for CNY 1.77 billion, acquiring a 55.7% stake. Currently, Newegg is the core source of revenue for Liaison Interactive, with Newegg's revenue in the first half of 2022 reaching CNY 5.778 billion, accounting for over 90% of Liaison Interactive's total revenue.

However, Newegg is not a profitable company. According to Zhitong App, although Newegg was once well-known in China before its acquisition, it has fallen out of the mainstream e-commerce camp in China after experiencing scandals and business decline from 2012 to 2014. Moreover, from a financial perspective, although Newegg still maintained a certain scale at the time of acquisition, it has never been able to solve the problem of profitability. As of June 30, 2016, Newegg's debt-to-asset ratio was 89.27%. It incurred a net loss of RMB 83.62 million and RMB 38.7451 million in the first half of 2015 and the first half of 2016, respectively.

It is not difficult to see that "profitability difficulty" has always been a problem for Newegg. However, as the acquiring company, Liaison Interactive is more interested in Newegg's business channels rather than its financials. It is understood that at the time of the acquisition, Newegg's business had expanded to multiple countries and regions including North America, China, and the UK, and had become the second largest B2C e-commerce platform in the United States.

In terms of revenue contribution, Newegg, which accounts for 90% of the revenue, has indeed become the mainstay of Liaison Interactive. However, this mainstay is not a cash cow.

Due to the sales attributes of 3C/IT products, companies often need to pay high sales costs. Taking Q3 2023 as an example, Newegg's revenue reached USD 1.041 billion, but the sales cost was as high as USD 923 million. Even though the company reduced its operating expenses by 24.72% YoY to only USD 118 million, it was unable to prevent the further expansion of the net loss.

In fact, the semi-annual report of Liaison Interactive also reflects the plight of being a 3C/IT e-commerce company. In the first half of last year, Liaison Interactive achieved revenue of RMB 5.391 billion, a YoY decrease of 14.63%, and a net loss attributable to the parent company of RMB 478 million, a YoY decrease of 87.87%. Liaison Interactive explained that the main reason for the performance loss was the insufficient consumer enthusiasm for electronic products, resulting in a decline in demand, especially for 3C/IT products.

Can the 3C/IT track still support performance?

With the deepening development of globalization, cross-border e-commerce has gradually become an important part of global trade. However, in the third quarter of last year, many cross-border e-commerce companies still faced problems such as intensified internal competition and rising costs.

Overall, data shows that in Q3 2023, the total revenue of 14 listed cross-border e-commerce companies reached RMB 1.058689 trillion, a YoY increase of 12.96%. In terms of net profit, the total profit of these 14 companies in Q3 reached RMB 80.136 billion, a YoY increase of 402.14%.

However, from a segmented perspective, the head effect and polarization in this track are more severe, and Liaison Interactive, the parent company of Newegg, may be falling behind its peers.

Looking at platform-based e-commerce companies, Amazon ranked first with a Q3 revenue of USD 143.1 billion, a YoY increase of 13%. Another company with revenue growth is eBay, with Q3 revenue of USD 2.5 billion, a YoY increase of 5%. However, the performance of smaller companies like Lianluo Interactive and Wish has been disappointing. Lianluo Interactive's Q3 revenue was 2.5 billion yuan, a YoY decrease of 5.44%. In the first three quarters, the company's revenue was approximately 7.891 billion yuan, a YoY decrease of 11.92%. Wish's current revenue is 60 million US dollars, a YoY decrease of 52%.

Looking at the 3C/IT product sector, both Lianluo Interactive and Newegg have seen a continuous decline in performance, possibly due to the decline in sales of popular 3C products.

Data shows that from January to July 2023, online sales of consumer electronics products reached 97.5 billion yuan, a YoY decrease of 3.7%. Among them, the highest sales were in the "mobile phone" category, reaching 39.1 billion yuan, a YoY decrease of 16.2%. The "audio and video" category followed with sales of 13.3 billion yuan, a YoY decrease of 8.4%. In terms of sales volume, the highest proportion was in the "audio and video products" category, with a YoY decrease of 8.2%.

In addition, the mobile phone market, as an important part of the 3C consumer market, has always been a key source of revenue for 3C/IT e-commerce companies. However, from January to July 2023, the total online sales volume of mobile phones was 10.11 million units, a YoY decrease of 20.5%, with sales amounting to 39.07 billion yuan, a YoY decrease of 16.2%.

In other words, the polarization trend in the e-commerce sector, combined with the fluctuations in the 3C/IT sector, has led to the decline in performance for Lianluo Interactive and Newegg in Q3 2023. This undoubtedly adds insult to injury for companies already struggling with internal issues.

Looking at the parent company Lianluo Interactive, according to the 2023 semi-annual report data, as of the end of June last year, the company's debt-to-asset ratio had risen to 92%. At the same time, the company's current ratio was close to 0.63, and the balance of current assets has been lower than current liabilities for several years, indicating a continuous deterioration in debt-paying ability. In addition, Lianluo Interactive was taken to court last year due to the overdue payment of a loan totaling 448 million yuan from the Industrial and Commercial Bank of China's Hangzhou branch, and received a regulatory letter. Newegg also had negative net cash flow from operating activities in Q3 2023, with a net outflow of 55.273 million US dollars and a cash balance of 55.143 million US dollars at the end of the period.

In summary, although the secondary market has given some positive feedback after the Q3 earnings report was released, both operationally and financially, Newegg's performance may not be able to support a long-term valuation rebound for the company. The factors that will affect the company's valuation reversal still depend on the overall business climate of the 3C/IT industry.