Is GigaCloud the latest ‘China Easter Egg’ on Wall Street?

The B2B e-commerce site’s stock jumped 30% after the release of its latest earnings report, which was filled with signs of turbulence from the U.S.-China trade war

Key Takeaways:

• GigaCloud reported 4% revenue growth in the second quarter and forecast flat growth ahead, as it suffered from fallout of the U.S.-China trade war
• Even after a 30% rally for its shares following the ho-hum report’s release, the e-commerce company’s stock still trades at a relatively depressed P/E ratio of 9

By Doug Young

When does a rather ho-hum earnings report, filled with slowing growth and no major turnaround in sight, look impressive?

The answer to that question appears to be: When your name is GigaCloud Technology Inc. (GCT.US), a B2B cross-border e-commerce site whose shares soared 30% after it released just such an earnings report last Thursday. Following the big gain on Friday, GigaCloud’s stock is up 56% this year, and its close of $28.91 is more than double its 2022 IPO price of $12.25.

Among other things, GigaCloud disclosed its revenue grew just 3.8% in the second quarter, down sharply from the 65% growth it reported for all of last year. What’s more, it forecast its revenue is likely to flatline in the current quarter, due in no small part to disruptions caused by the U.S.-China trade war.

There were also a few positive signals in the report, including signs that the company is making steady progress in turning around a troubled acquisition it made in 2023, and steady progress in developing Europe as an alternate market to the volatile U.S. But nothing seems to really justify the 30% stock rally, which added nearly $200 million to GigaCloud’s value and pushed its market cap above the $1 billion mark.

So, why the sudden interest in this company, which makes its living by matching Chinese, Vietnamese and Malaysian manufacturers of bulky products like furniture, home appliances and fitness equipment with buyers in the U.S., Europe and Japan? The answer could be a big valuation gap that’s developed over the last four years, leaving many U.S.-traded Chinese stocks grossly undervalued compared with their global peers.

We’ve written about a couple of these stocks recently, which we’re calling “Chinese Easter Eggs” because they’re undervalued companies that have been hiding in plain sight all this time. Shares of one of those, cosmetic surgery center operator So-Young (SY.US), have risen more than fivefold since mid-June, while another, wearable device maker Zepp Health (ZEPP.US), has risen nearly tenfold since the start of July.

GigaCloud has a similar profile to that pair in that its business is basically sound and it trades at relatively low valuation ratios. Even after the big rally last Friday, the stock still trades at a lowly price-to-earnings (P/E) ratio of just 9.4. That’s well below domestic peer EDA Holdings (2505.HK) at 25, and light years behind the U.S. pair of Salesforce (CRM.US) and Shopify (SHOP.US), which trade at ratios of 38 and 83, respectively.

While Salesforce and Shopify are obviously much bigger, GigaCloud could have some potential due to its position as a platform linking developing world manufacturers with retailers in developed markets.

It initially sourced most of its products from China, but has added Vietnam and Malaysia, and is likely to add other similar markets in a bid to distance itself from the U.S.-China trade war. At the same time, it was once highly reliant on U.S. buyers for most of its sales, but is making rapid headway into Europe and also has a presence in Japan.

Stalling revenue growth

Having explained why investors may now be discovering GigaCloud, we’ll return to the company’s latest report that looks like quite the mixed bag. Commentary within the report and from executives on the company’s earnings call was filled with references to turbulence from the U.S.-China trade war, describing a “challenging environment” with an “unprecedented level of uncertainty.”

“We have a few curveballs,” Chairman and founder Wu Lei, who also uses the English name Larry, said on the earnings call.

On its top line, the company managed to post some year-on-year revenue growth, though only slightly, as the figure rose to $323 million from $311 million a year earlier. GigaCloud managed to keep signing up new users to its platform, though the rate of new signups for both active buyers and sellers slowed down.

And in a less-than-encouraging trend, spending per active buyer for the 12 months to June fell 13% to $131,359 from $151,276 in the 12 months to June 2024. The company blamed the drop on the addition of new buyers, who typically start by making small purchases and then scale up their buying as they become more comfortable with the platform.

Things look set to worsen in the third quarter, with the company forecasting revenue of $295 million to $310 million for the three-month period. The midpoint of that range would represent flat growth from the $303 million GigaCloud reported a year earlier.

Geographically, GigaCloud’s U.S. domestic product sales fell 11% year-on-year during the quarter, though the company didn’t give an actual dollar figure. That was offset by a 59% year-on-year jump in its revenue from Europe, as the company opened an additional fulfillment center in Germany during the quarter, bringing its total to six such facilities in the country. Following the strong growth, Europe now accounts for about a quarter of GigaCloud’s revenue, the company said.

“Europe is emerging not only as a growth region, but as a strategic pillar of our global expansion,” said President Iman Schrock. “Over time, we see Europe as having the potential of becoming a business of comparable scale and significance to our domestic U.S. operations in the years ahead.”

As it felt the effects of tariff disruptions, including a brief but big spike in U.S. tariffs on Chinese goods in April, the company’s gross margin dropped to 23.9% from 24.6% a year earlier. But a steep drop in general and administrative expenses, mostly due to lower stock-based employee compensation, helped the company to boost its net income by 28.1% year-on-year to $34.6 million.

GigaCloud has been growing organically, as well as through acquisitions. One of the largest was its $85 million purchase in 2023 of Noble House Furnishings, a bankrupt American B2B distributor of indoor and outdoor home furnishings. Company officials made numerous references to their efforts to clean up Noble House on the earnings call, noting the company’s product offerings have now been “rationalized” and its operations integrated into GigaCloud.

We’ll need to wait a few more days or weeks to see whether GigaCloud can sustain its recent stock gains, or whether the sharp uptick was the result of short-term speculation. If it can hold on to the gains, and perhaps even add to them, the company could well become the latest member of this new class of “Chinese Easter Eggs.”

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