The first rule of growth investing and short-term trading is that current valuations should never really matter. After all, stories for evaluating companies in the year 2025 or 2030 have to come at a massive premium. Unfortunately, the argument of logic versus valuation does come into play, even if day traders and speculators just watch trends and charts. When it comes to news announcements, particularly around earnings reports, the realities of valuation can be everything.
BigCommerce Holdings Inc. (NASDAQ: BIGC) has been touted by some investors as the “next big ecommerce company.” The problem here is that BigCommerce’s total annual revenue growth of 33% is going to need to quicken much more in a post-COVID-19 world before the market can handle the current valuations.
When a deal was announced with Facebook Inc. (NASDAQ: FB) to unlock a checkout feature on Instagram, BigCommerce’s stock price basically doubled by the point the peak was seen. On August 25, BigCommerce’s stock price rose from under $80 to $104.09.
A gain of nearly 37% in a single day should have been impressive enough, but the momentum traders took BigCommerce shares to astronomical levels. The following day saw a high of $151.99, and the next day a high of $162.50, but those same days had respective closing prices of $139.00 and $141.00. The much-needed tech sell-off of last week had BigCommerce’s stock down to $91.50 ahead of Wednesday’s earnings report.
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BigCommerce’s earnings report was its first quarterly report since coming public over the summer. The firm said that it had a net loss of $0.38 per share on $36.3 million in revenue, while consensus estimates had called for a net loss of $0.32 per share and $34.37 million in revenue. Its total revenues increased 33% year over year, but the total annual revenue run rate was up 32% at $151.8 million.
Where investors needed to bring in at least some caution was the massive valuation that already was reflected in the growth. The reality is that BigCommerce has huge growth opportunities ahead, and its stock ultimately could climb higher. It’s just going to have to score more hallmark deals and to land more big clients.
As the analysts were able to start issuing reports, BigCommerce’s stock was looking severely overvalued. Scoring Instagram was no slouch, but the company already counted 60,000 businesses as clients, and it already helped sellers on major online destinations such as Amazon, eBay, Facebook, Google and the Square POS.
When the analysts broke their silence on August 31, the stock was still at $115 or so. The largest cautionary research report came from Morgan Stanley, and this firm was the very first named lead underwriter of the initial public offering. The firm issued an Underweight rating, the equivalent of a Sell rating at other firms, and a mere $52 price target.
After this first earnings report as a public company, analysts have sounded even more caution about the valuations reflected in the stock.
Terry Tillman of Truist (formerly SunTrust Robinson Humphrey) first issued a $132 price target, and at that time he said BigCommerce has a differentiated open software as a service e-commerce platform that has made growth investments and has seen market share gains. Tillman also signaled that it will have sustained and improved topline growth. The warning in the report was that BigCommerce’s valuations had less favorable risk-reward metrics compared to other companies in the space, and the firm’s 2022 revenue forecasts are just above $200 million.
Given the market cap of $7.7 billion at the time analysts started issuing coverage, Truist was still valuing the company at nearly 40 times revenues that are expected in two years. After Wednesday’s report, the Truist target price was lowered to $100 from $132.
Morgan Stanley was kind enough to raise its target price to $53 from $52 on Thursday morning, but the firm still reiterated its Underweight rating in that call.
Two other analyst reports have been seen so far, and it is assumed that other reports are either coming or have already been released but are not yet available for non-clients to peruse. Barclays maintained its Equal Weight rating and lowered its target to $95 from $128. Canaccord Genuity maintained its Hold rating and cut its target from $125 to $90.
BigCommerce stock traded down about 6.5% at $85.50 on Thursday morning. Its post-IPO range is $63.77 to $162.50, but its formal IPO price was actually $24.00. Even with a $5.7 billion valuation after the earnings report, its stock is valued at 40 times this year’s consensus revenues and would be valued at nearly 30 times 2022 revenues while it is still losing money.
Sometimes those pesky valuation metrics just matter, whether or not the investing and trading community want that to be the case.
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