CDON (CDON.SS) | 1Q21 Update

Updated: Aug 1


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Key Points

  • Underwhelming yoy GMV growth of 25% for 1Q21

  • CDON continues to benefit from a shift out of the 1P model

  • Respectable increase in the number of active customers of 25% and impressive 50% increase in the number of active merchants

  • CEO overhang lifts as CEO Kristoffer Valiharju returns

  • Revised DCF fair value per share of SEK680

1Q21 Financial Highlights

CDON was able to cut its operating loss from -SEK15.2 million in Q1 2020 to -SEK13.6 million in Q1 2021. This is mainly attributed to lower Costs for Sold Products and Selling Expenses. As a result, CDON was also able to cut its net losses from -SEK14.5 million in Q1 2020 to -SEK13.8 million in Q1 2021.


CDON's 1Q cash flow figures also improved y.o.y. CDON's Cash Flow from Operating Activities and Change in Cash Flow for the Period, turned less negative, improving by SEK25.4 million and SEK44.8 million for 1Q respectively.

Our Five Key Observations

1. Lower than Expected GMV Growth Rates

Compared to our projected yoy GMV growth rate of 60% in our base case, CDON's 3P GMV only grew by 25% yoy. As a result, the company's total GMV only grew 4% yoy from Q1 2020. We believe the muffled GMV growth rate could be partly attributed to an affected customer experience due to automation and indexation issues on its new platform.


2. Reaping the Benefits of a Continued Shift from 1P to 3P Model

We are seeing a continued shift from CDON's older 1P model to a more asset-light, and scalable 3P model. Compared to 4Q2020 where 3P GMV made up 77.4% of total GMV, 3P

GMV now makes up 80.3% of total GMV, representing an increase of 2.9 percentage points.

The shift out of a 1P model is also evident in ~17.9% fall in inventory levels from end of FY20 to 1Q21.


As such, CDON continues to reap the benefits of a higher gross margin and lower capital intensity overall business. The company reported an expansion in gross margin of 12.5 percentage points to 36.5 percent.


3. Network Effects underway Increase in Number of Merchants

CDON reported a 25% increase in the number of active customers and an impressive 54% increase in active merchants. While the total number of orders remains largely similar, the average shopping basket size has increased by 5% yoy. We believe this will continue to drive network effects allowing CDON to continue to become more attractive for both customers and merchants, allowing CDON to further widen its competitive moat.


4. Lifting of CEO Overhang

The role of the CEO of CDON, which is in many ways is a start-up, is paramount especially in its 1P to 3P transition. The stock has previously traded down on news of CEO Kristoffer Valiharju's temporary step down due to illnesses. However, in a separate press release on 20 April 2021, CDON has announced that Kristoffer Valiharju will be returning earlier than previously expected on 1 May 2021.


5. Competition from Amazon

In our CDON Deep Dive, we discussed the possible risk of e-commerce giant Amazon eroding CDON's market share as the spread of the total visits to Amazon.se and CDON.se seems to be widening. We are starting to observe the spread between Amazon.se and CDON.se's web visit converge, which demonstrates a health sign of CDON protecting its market share. We also continue to note CDON's superior engagement statistics over Amazon's.

Our Views on CDON's Outlook

We believe that CDON is a long-term play and it would continue to benefit from the secular e-commerce growth in the Nordics. We believe that the fundamental shift in the business model will result in higher margins, more scalability, and greater capital efficiency. We are slowly seeing CDON's greater network effects in play and an ongoing transition to a 3P-focused model. While CDON has been facing platform upgrading issues, which have resulted in a lower than expected GMV growth rate, we find respite in the lifting of its CEO overhang and increase in the number of active customers. At a closing price of SEK533, we believe there is still an upside in CDON.


Valuation


CDON's 1Q21 results have provided a little more visibility on key indicators and we have applied a few key changes to our model:

  1. Revised GMV Growth Rate Declining Factor from 30% to 60%, resulting in a fall in implied GMV Growth Rate from 60% to 30%

  2. Lowered 3P Take Rate from 12.9% to 10.7%

  3. Increased 1P Gross Margin from 9.3% to 11%

  4. Lowered applied WACC to 8% from 10%, which we believe is still conservative compared to our calculated WACC of 5.5%

  5. Applied revised EV/EBITDA exit multiple of 25.1x, which represents the peers median LTM EV/EBITDA multiple

Based on our revised financial model, we derived a fair value/share of SEK680 using a Discounted Cash Flow analysis (DCF) with the Exit Multiple Method as our primary valuation method. This represents a possible upside of 27.5% from the last closing price of SEK533. We supported our valuation with a DCF using the Gordon Growth Method, which yielded a fair value/share of SEK610.


Conclusion

Since our last article on 13 March 2021, CDON has plunged from SEK656 to reach SEK533 at the time of writing, marking a 23% decrease. We look forward to CDON's next print of its total active customers, GMV growth rate, and gross margin.


Thanks for reading,

Shawn


PS. If you wish to read our previous article on CDON, you can find it here.


Disclaimer: We are long CDON at an average price of SEK465.09. This article is not an investment (buy/hold/sell or otherwise) recommendation, this is only for educational and discussion purposes. This article is not tailored to the specific circumstances of any reader. I/we/The Snowball do/does not purport to be in the business of providing financial advice and the contents of the article should not be regarded as such.


Cover photo source: Amanda Vick on Unsplash

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