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CDON is one of the largest e-commerce companies in the Nordic region
Shift to marketplace-focus to improve business fundamentals
Competitive moats such as customer knowlewdge from legacy business and network effects to protect CDON's gross merchandising value
Declining headline figures conceal rapid 3P GMV growth
Increased coverage to kickstart price discovery process
DCF-backed fair value estimate of SEK1,253, representing a possible upside of 90.9%
CDON, founded in 1999, is one of the largest e-commerce companies in the Nordic region. CDON has a wide range of consumer electronics, books, games, movies, sports and leisure items, clothing, shoes, furnishings, and toys. It extended its assortment by opening up for external merchants in 2013 and started to reduce its own inventory in 2018. In 2019, it achieved positive EBITDA. As of 2020, CDON has about 2.3 million active customers and over 1,500 merchants.
CDON has two business segments, CDON Marketplace (3P) where revenue is generated from third-party merchants and other services, and CDON Retail (1P), in which revenue is from its own warehouse or drop shipment. CDON aims to drive growth by adding new merchants, increasing the gross merchandising value (GMV) of existing merchants, and launching new services for its merchants. In contrast, CDON is gradually phasing out its CDON Retail, by phasing out the sales of its own inventory. CDON Retail mainly sells products not offered by external merchants via CDON Marketplace.
CDON’s revenue is derived from Sweden and other Nordic countries. The company’s geographical contribution mix has remained relatively constant between 2017 and 2019 with Sweden contributing ~58.7% of the company's total revenue and Other Nordic Countries contributing ~41.3%.
CDON is ranked as the top 10 most popular webshops in Sweden in 2019, trailing other players such as Zalando.se and adilibris.com.
The e-commerce industry in Sweden, and by extension, the Nordics, is a highly fragmented one. According to Euromonitor, the top 19 e-commerce players in Sweden own less than 50% of the total market share. Additionally, CDON is said to have 1.6% of the Swedish e-commerce market share.
Sweden led the Nordics in terms of total value e-commerce purchases followed by Norway, Denmark, and Finland. In 2019, the total value of e-commerce purchases totaled SEK 243 billion in the Nordics.
The Nordic e-commerce industry is said to be in the expanding phase, behind countries in the advanced phase such as US, UK, South Korea, and China.
Clothing/footwear consistently capture the largest number of shoppers across Denmark, Finland, Norway, and Sweden. This is followed by pharmacy products and home electronics.
Share Price Movement
The chart above shows CDON's stock price movement. Since its listing on 6 Nov 2020, CDON’s stock price has been very volatile. CDON's stock price was given a massive boost when Brad Hathaway of Far View Capital Management presented his investment thesis on CDON at MOI Global's Best Ideas 2021. Following its FY20 earnings release, the company's stock price declined by more than 20% intraday as GMV and revenue growth expectations were not met. After management explained that platform changes and supply chain disruptions affected growth in the earnings call, investor sentiment recovered, and the stock traded upwards to finish the day in the green. Shortly after, the stock reached a high of SEK 975 following SEB Group’s initiation with a target price of SEK 850. However, the sector rotation out of growth stocks and the temporary resignation of the CEO added selling pressure and caused a 36.7% decline from its all-time high to the 5th March close.
We expect CDON's Gross Profit to continue to grow by a CAGR of 23.4% to SEK873 mn in FY2025. This growth is anticipated to be supported by a (1) shift to a marketplace-focused business which is expected to improve business fundamentals and 2) widening competitive moat. In addition, we believe that an increase in analyst coverage would kickstart CDON's price discovery process.
Thesis 1: Shift to Marketplace Focus to Improve Business Fundamentals
In 2013, CDON opened its website to external retailers signaling the start of its transition from a 1P into 3P business model which is now CDON’s key focus and growth driver. CDON highlighted that its ambition to transform into a marketplace was driven by the lower capital intensity requirements and ability to provide a wider range of products. We believe that the benefits of a Marketplace Model (3P) are three-fold.
a. Margin Expansion due to Lower Costs per unit Profit
On a unit economics basis, CDON’s 3P business is vastly superior to its 1P business as shown by the gross profit margin of its 3P business (93.4%) being 84.1% pts higher than its 1P business (9.3%).
Based on our gross profit analysis using our base-case assumptions, we estimate that gross profits will increase by SEK 2.95 for every SEK 100 GMV change from 1P to 3P. We also believe that benefits in earnings extend below the gross profit line as cost-savings from a decrease in selling and admin expenses also play out.
The 20.3% pts expansion in overall gross margin from FY17 to FY20 as a result of CDON's gradual 1P to 3P shift demonstrates our thesis. Based on our projections, in our base case, although FY21’s total revenue is expected to continue to decline, gross profits are expected to grow by ~52%. Therefore, we believe CDON’s transformation from a 1P to 3P model will continue to increase its long-term profitability.
b. Lower Capital Intensity
The 3P model does not require CDON to hold any inventory. As such, as CDON relies less on its 1P business, it can stock less inventory, directly leading to lower working capital requirements. In fact, a shift to a 3P-focused model has allowed CDON to have a negative working capital of ~SEK 173m in 2020. This is beneficial for the company as its cash increases when its size increase. This facilitates growth as the company would not have to finance its inventory for growth. According to CDON’s 2019 Annual Report, the company has been deploying this capital into automation to make it easier for new merchants to drive sales, which will eventually benefit CDON in terms of an increase in net sales. Given the significant decrease in working capital requirements from a 3P model, CDON can reinvest its cash to develop its revenue streams allowing it to continue to grow at high rates.
c. Increased Streams of Income
Compared to a traditional 1P business where the dominant, and often sole, income stream is from the profit on product/services sold, CDON’s 3P business opens up a suite of revenue sources. Currently, CDON revenue is generated from take-rate commissions on marketplace GMV, from monthly merchant subscription fees (launched in Q4/20), and advertising income. In its 2020 year-end report, CDON highlighted the possibility of other revenue streams such as integration with external marketplaces, order management support to fulfillment centers, and offering a complete digital sales channel for brands, manufacturers, and merchants.
In addition, during its 4Q20 earnings call, when questioned on the possibility of creating its own cloud software service (akin to Amazon Web Services) and payment service (akin to a Shopee Pay), management acknowledged the possibility of working on these suggestions in the future.
Thesis 2: Widening Competitive Moat
Legacy Business Provides Unparalleled Local Expertise
We believe that CDON’s more than 20 years of retail experience will continue to allow it to thrive and maintain market share in the Nordic market. CDON’s legacy business should provide it with first-hand data of consumer behavior in the Nordics, allowing the company to have a superior shopping experience, conduct more effective marketing campaigns, and work more closely with brands that match its consumers’ tastes and preferences. We also believe that its legacy business provides the company with access and an existing relationship with the top merchants in the region.
We note that in 2019, most of the top 10 webshops in Sweden are veteran retail players, with more than 10 years of retail experience in the Swedish and Nordic regions. At the same time, we also note that none of these companies are headquartered outside Europe. We believe these serve as strong indications of the competitive advantage local retail veterans have over other international e-commerce players.
Network Effects to Widen Competitive Moat
In addition to the competitive advantage generated by the company’s legacy business, strong network effects are also expected to come into play.
We believe that as the leading e-commerce platform in the Nordics, CDON will be able to capture the interest of users looking to shop online. This will result in an increase in CDON’s GMV, allowing it to increase its earnings and cash flows. This in turn provides CDON with a greater ability to onboard more merchants, resulting in active merchant growth. With a greater selection of brands and products, CDON becomes even more attractive to buyers, generating active customer growth. We believe that such self-perpetuating cycles of network effect will drive GMV and net sales growth.
At the same time, given that CDON Marketplace requires low/no inventory, as GMV grows, the marginal cost for providing services will continue to remain low, directly translating to higher gross margins. This is evident in FY20 when the company’s 86% YoY 3P GMV growth was accompanied by a 1.32% pts increase in 3P gross margins.
We expect the benefits of the network effect to impose a strong barrier to entry to any new or potential entrants to the industry. Therefore, ensuring that CDON’s market share remains intact and its GMV potential could be realized.
Thesis 3: Increased Coverage to Kickstart Price Discovery Process
According to Yahoo Finance, the average trading volume of CDON’s stock is a mere 197,445. This is almost 60 times smaller than the OMX Stockholm 30 Index (^OMX) average volume of 11,492,816. We believe that this is an indication that CDON’s shares remain unknown to the broad international investors.
Declining Revenue Figures Conceals Astronomical 3P GMV Growth
One of the reasons CDON’s stock remained inconspicuous could be its declining revenue figures. From 2017 to 2020, CDON has experienced consecutive years of revenue decline, with y-o-y declines as high as 28.8%. While we believe that such declines are not a cause for concern, as we expect gross margins to increase due to the shift from a 1P to 3P model, we opine that this had made the company seem unattractive at first sight, resulting in CDON’s shares being glossed over by many investors.
Lack of Sell-Side Coverage
We believe that the lack of sell-side coverage had also contributed to CDON being hidden from institutions and other retail investors. Through our research, we were only able to find a single equity report covering the company – an initiation report by SEB commissioned by CDON. As many investors might depend on equity reports for stock ideas and trades, this could have led to the stock falling under the radar of investors.
We are Near a Pivotal Turning Point
We believe that CDON is at a turning point. From our primary research, we found out that CDON is actively hiring an Investor Relations Manager.
We found and google translated a LinkedIn job post in Swedish and noted that CDON is hiring an Investor Relations manager that is able to write in both Swedish and English and can increase CDON’s exposure to international investors by booking roadshows/group calls.
Hints of CDON’s effort to beef up its appeal to international investors can also be seen in the company’s Financial reports section of their website. While CDON’s 2019 and 2018 annual reports were published in Swedish, which rendered them un-reader-friendly for non-Swedish readers and investors, CDON has published its first financial report in English representing a positive step towards attracting international investors. We hypothesize that CDON is in the works of trying to appeal to a more international market of investors.
We opine that as CDON beefs up its English Investor Relations team, interests of more institutional and retail investors will be attracted. This could lead to more demand for CDON’s shares, providing upward pressure on CDON’s stock price.
Based on our excel financial model, which is accessible to our Snowball Community members for download [sign up here], we derived a fair value/share of SEK1,253 using a Discounted Cash Flow analysis (DCF) with the Exit Multiple Method as our primary valuation method. This represents a possible upside of 91% from the last closing price of SEK656. We supported our valuation with a DCF using the Gordon Growth Method, which yielded a fair value/share of SEK1,217.
Applied WACC of 10%, which is conservative given that the Capital Asset Pricing Model cost of equity yields a WACC of ~5%.
EV/EBITDA exit multiple of 16.7x, which is the 25th percentile peer EV/EBITDA multiple
FY26-FY30 Free Cash Flow to Firm (FCFF) growth rate of 15.6%, which is the y-o-y FCFF growth rate of 15.6% in FY20.
FCF terminal growth rate of 2.1%, which is the average of Sweden’s GDP growth rate from 2015-2019
The tables above show CDON's sensitized fair value in our Exit Multiple method and Gordon Growth method DCF calculations.
To project CDON Marketplace’s GMV, we applied a declining factor on its GMV growth rate. We applied a declining factor of 70% for our Bear case, 30% for our Base case, and 20% for our Bull case respectively. We believe that our estimates are fair given that the Nordic countries' total market spend on online shopping is SEK814,910 million in 2019 according to Statista, compared to our FY2025 base case GMV of SEK7,187 mn, representing a 0.88% market share. We then applied a conservative take rate of 10% (vs FY2020’s 11.5%) and a conservative gross margin of 90% (vs FY2020’s 94.1%) to arrive at our gross profit estimates.
1. Competition from E-Commerce Giant Amazon
Comparing Amazon.se’s performance with CDON’s for January 2021, Amazon.se’s total site visits is~1.6x higher than CDON's. We also note that total visits appear to be diverging, possibly indicating that Amazon is eating into CDON’s existing market share. We believe that this could be possibly due to a price leadership strategy Amazon adopts when attempting to capture market share in new markets. However, we believe that the e-commerce industry is not a winner-takes-all market and that it is large enough for Amazon.se to coexist with CDON and other Nordic e-commerce players.
Further analyzing the site visit analytics, the average user spent 72.36% more time on CDON than Amazon.se. This could also possibly indicate a superior conversion rate for CDON.
Additionally, CDON has a long history in the Nordic region which may enable it to create a more local-centric website and develop better merchant relations helping it to maintain its market share.
Overall, we are cognizant of the potential consequences of Amazon’s entrance and will closely monitor CDON’s GMV growth and compare CDON’s web visit statistics to its peers but we believe the total addressable market is large enough for multiple platforms to thrive but CDON must focus on crafting its unique proposition.
2. Execution Risks Exacerbated by CEO Kristoffer's Absence
Despite being the market leader, CDON is still in the early stages of growth with many potential avenues for further growth (i.e. mobile application, payment processing). This gives rise to potential execution risk.
On 5 March 2021, CDON announced that CEO Kristoffer Väliharju will temporarily resign as CEO due to illness for a period of up to 6 months. We believe that this further exacerbates CDON's short-term execution risks given the important role we expect the CEO to play in CDON's transition. Given that CDON is in a very important growth stage, 6 months is a long time and CDON may be left exposed to the competition if CDON’s management team is handicapped by CEO Kristoffer’s absence.
However, we note that Kristoffer’s short-term replacement, Marcus Lindqvist who was CEO and President of Qliro Group, which included CDON, fashion brand e-tailer Nelly, and fintech company Qliro, from July 2016 until June 2020, is well-qualified to lead CDON through this stage of growth.
Given that the stock has declined ~25% from its peak, we opine that such an execution risk is appropriately baked into the price. Given that CDON is already sold down, entry into CDON at its current price presents a favorable risk-reward skew, given the potential recovery in stock prices.
3. Post-Pandemic Shopper Behaviour
The spike in the GMV growth could be due to a shift from physical to online shopping spurred by the pandemic. Thus, there is a possibility that as the Nordic region achieves herd immunity, active customers acquired by revert back to shopping offline.
But, according to a study on habit formation, it takes 66 days on average before a new behavior becomes automatic. We subscribe to this belief and opine that online shopping is here to stay and will continue to grow as the larger base of buyers and sellers create stronger network effects as elaborated in Thesis 1. As inoculation rates rise and the need for online retail turns into a want, the focus will shift to finding which online retailer is the best. Given CDON’s advantage of being in the Nordic region for a long time, we believe it has a good shot at creating the dominant platform by locals for locals as explained in Risk 1.
1. Increased Analyst Coverage
As elaborated in our third thesis, we believe CDON is still very much in the price discovery process. A lack of analyst coverage and historical 3P data makes it hard for the public to price it. We believe that given its strong growth trajectory, with more coverage, CDON’s stock will become a more well-known e-commerce marketplace stock and the EV/GMV multiple gap to its peers (e.g. $JMIA) would narrow. In addition, as mentioned in our thesis, we believe that the successful hiring and execution of IR efforts will help to drive this.
Expected Date: Uncertain
2. Strong 1Q21 Results Due to the lack of management guidance on FY21’s financial figures, the market remains in the dark of its potential rate of growth. Thus, if a strong set of results are released in May 2021, concerns of an ‘Amazon-takes-all’ scenario will be allayed, and it will demonstrate that the miss in 4Q20 GMV growth could be a one-off mishap due to a platform switch. Hence, we believe that a strong 1Q21 result could serve as a strong catalyst. Expected Date: May 2021
3. Clearing of overhang on positive news of CEO returning CDON declined much larger than the broad market on 5 Mar 2021 as it was announced that CDON's CEO Kristoffer temporarily resigned as CEO as he underwent surgery for irregular heartbeat and is expected to return to his position as CEO within 6 months. We believe this will create an overhang over the stock until the CEO comes back as investors remain cautious about a potential slowdown in growth. We expect that the overhang will clear once CEO Kristoffer returns or strong 1Q21 growth is shown causing investors to be optimistic that growth can continue despite his prolonged absence. Expected Date: Before 5 September 2021
The current closing price of SEK656 presents an attractive entry opportunity into one of the Nordic region’s leading e-commerce players. We see significant upside given improvements in business fundamentals, widening competitive moat, and an increased coverage leading to CDON's price discovery process.
Thanks for reading,
Shawn and Joseph
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.
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