The shares of computer hardware and consumer electronics retailer Newegg Commerce (NASDAQ:NEGG), an e-commerce company, have been on fire. NEGG stock has gained an incredible 78% in the past three months.
The rally can’t be attributed to the company’s fundamentals or any other news. Instead, the stock has been a hit with the retail trading crowd ever since its shares became publicly traded through a merger. However, the hype is now wearing off, and it’s becoming clear, based on Newegg’s fundamentals, peer comparisons, and outlook., that its shares are significantly overvalued
Since its merger on May 19,, Newegg has more than doubled. It boasts a market capitalization of over $7 billion after a significant correction in recent weeks. That is still substantially higher than its initial valuation of roughly $880 million. Given the company’s unconvincing growth prospects and extremely bloated valuation, it’s tough to get excited about NEGG stock at this point.
Questionable Growth Prospects
Newegg’s growth prospects appear to be unconvincing. Bear in mind that, with its overblown market capitalization, much of the firm’s potential has already been priced into the shares.
Furthermore, Newegg focuses on delivering its products at remarkably low prices. As a result, its margins are extremely thin, and its profit has hovered at roughly 13% of its sales.
Additionally, its operating margins are even lower, coming in at just 3% of its revenue. Consequently, the retailer is highly susceptible to negative macro catalysts. The U.S.-China trade war, for instance, could have a massive impact on its top and bottom lines.
The bulls talk about the 38% increase in Newegg’s net sales from 2019 to 2020. In the latter year, of course, the pandemic peaked.
However, it’s important to note that the company’s sales fell meaningfully from 2018 to 2019, and that its 2020 revenue only marginally exceeded its 2018 sales. Moreover, most of the company’s growth in 2020 was driven by pandemic-induced tailwinds, which are likely to fade away over time. Therefore, it’s tough to be excited about a company without a solid track record of growth.
The company disclosed some of its plans in its prospectus earlier this year. One key growth area is its Marketplace business, which focuses on selling third-party goods to consumers. Most of these goods are sourced from China. Newegg’s plans are unclear and can hardly justify its unreasonable valuation.
An Odd Merger
Newegg Commerce became a public company via a backdoor merger with Lianluo Smart Limited. Both companies were under the control of their majority shareholder Zhitao He.
Zhitao is currently a director of Newegg Commerce and was the former chairman and CEO of Lianlou. Typically, companies that opt for such arrangements are involved in similar businesses.
However, the companies, in this case, were unrelated. Newegg is an e-commerce company, while Lianlou was a medical device distributor. Regardless, both companies shared common executives and directors.
Moreover, Nextegg’s management hardly talked about the benefits of the company going public. Instead, its focus was more on how the merger would potentially solve the challenges faced by Lianluo
The Bottom Line on NEGG Stock
NEGG stock is the newest entrant in the growing list of meme stocks. Newegg is trading at unfathomable levels without any justification.
Its growth prospects are rather unconvincing at this stage, especially in light of the strong competition it currently faces. Therefore, it’s best to avoid NEGG stock at this time.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines
