I am a big fan of European tech and I want to raise awareness about the interesting tech companies listed by writing in-depth company reviews. As part of the research process, I started following some European names and checking their quarterly earnings. I found Allegro's latest earnings quite interesting, and I'd like to share some initial thoughts on the business before diving in deep. If you would like to share your opinion/discuss the company in detail, please contact us.
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Informations about company
company description
Founded in 1999 in Poland, Allegro is Poland's leading managed online marketplace that connects buyers with products offered by sellers. Vendors sell products in a variety of categories, including automotive; House and garden; books, media, collectibles and art; fashionable electronics and footwear; kids; health and beauty; sports and free time; and a supermarket.” Since most transactions on the platform are made by third parties ("3Ps"), Allegro is similar to Alibaba's e-commerce marketplace model. In addition, Allegro has implemented several tactics from the Amazon/Alibaba/Mercado Libre manual to spur growth, including Prime Membership (SMART!) and related revenue streams including advertising and fintech products.
“Allegro is one of the most recognizable e-commerce brands in Poland. In fact, every month the website is visited by over 20 million Internet users, which is 63% of the adult population of Poland (aged 16 and over). With 13.2 million active customers and $7.6 billion GMV (FY 2020), Allegro represents 3% of the total retail market in Poland.
On October 20, Allegro debuted on the Warsaw Stock Exchange (the largest IPO in Polish history). After a strong share price performance, the share price recently fell, which is in line with the performance of other e-commerce companies as the economy reopens. As of today, Allegro has a market value of USD 16 billion.
Business model - dredging
Since 1999, the Group has moved from the C2C market to the B2C market, and finally to the "platforma e-commerce. To better understand the current business, I have outlined the key revenue segments below. 3P Marketplace revenue accounted for 81% of revenue in 2020 and is the main pillar of the business. Other affiliations include retail revenue (1P), advertising, other (fintech and hosting), eBilet (event tickets) and price comparison website (Ceneo.pl).
market business
3P Market Revenue
"The market generated revenue mainly by facilitating 3P transactions between buyers and sellers and charging sellers commissions and other related fees." The key drivers of 3P Marketplace revenue are (a) number of active users, (b) GMV per active user, and (c) acquisition rate.
Retail revenue (1P)
The Group also has its own 1P retail business on a limited scale, which is expected to complement the 3P business and account for 0.6% of the Group's GMV in FY2020. In my understanding, this is not considered a growth factor, but rather a liquidity mechanism in terms of ( as needed) and launching new categories.
Announcement
"The group generates advertising revenue by providing various types of advertising opportunities to brands and retailers on the platform." At the regulatory level in Poland, a tax on digital advertising has been proposed, the adoption of which may cause some risk of deterioration of the situation.
Inne (Fintech)
Although the majority of "other revenue" today includes hosting services, I would like to focus on fintech products, which are included in "other revenue", as they are considered to be the main drivers of growth for the future of business.
Allegro pays for users
“The group recently launched Allegro Pay to provide new sources of revenue from fees and interest on loans. Allegro Pay offers targeted credit availability; industry-standard credit checks for lending; seamless user experience; and a simple and intuitive checkout process. Allegro Pay is easy to set up and quick to use. It offers buyers a pre-approved purchase limit of up to PLN 4,000/$ 1,100 with the option to buy now and pay within 30 days without interest or in up to 20 monthly installments. "
Factoring for traders
“In the second half of 2020, the Group entered into a cooperation agreement with the invoicing factoring provider PragmaGo in order to offer instant payment services to merchants. The factoring service allows sellers to receive payment immediately after selling a product on the Group's platform, while the Group can offer buyers the option to defer payment.
eBilet - Ticket Platform for Events (acquired in 2019/20)
„The leading event ticketing portal in Poland, facilitating the sale of a wide range of entertainment, cultural, family and sports events, with approximately 2.3 million tickets sold in FY 2019. Operations were obviously disrupted due to the closure of live events last year. Since ticket sales are market-based, eBilet revenues are part of the marketplace revenue segment and are not split separately.
(Video) How to create a footprint using the Allegro PCB Editor?
Inside
Ceneo.pl - Price comparator (acquired in 2006)
“Ceneo.pl is the leading multi-category price comparison website in Poland. In 2019, it attracted an average of 21 million monthly users. As of June 30, 2020, 18,000 online retail stores are registered in Ceneo.pl, and information on 23 million product offers is available to consumers through a price comparison website.
network effects
Like other marketplaces, Allegro uses strong network effects as a source of defense. The "steering wheel" can be described as follows:“As more sellers join the platform, the range of products offered increases and price competitiveness improves, which in turn leads to an increase in the number of buyers browsing and making purchases on the Group's e-commerce market. On the other hand, as more and more shoppers look for and purchase products, the Group's e-commerce market is becoming more and more attractive to merchants.”
As a result of Allegro's dominant market position, supported by network effects,buyers love this platformdue to better (a) choice, (b) price and (c) convenience compared to other platforms.
Allegro is on the supply sidethe main choice of tradersdue to (a) large customer base, (b) ease of use, and (c) platform drivers to increase GMV.
Financial results for the first quarter of 2021
On May 13, 2021, the company announced financial results for the first quarter of 2021. Allegro, as an e-commerce company, clearly benefited from last year's lockdowns, which made it difficult to compare financial results this year. Overall, the company reported a good set of results, including strong GMV growth, combined operations and strong profitability against tough benchmarks. A detailed financial analysis is provided below.
Major financial events
The table above shows historical gains and losses in millions of dollars, with the main items analyzed below. I have not analyzed Opex positions to keep this section short and concise.
1) GMV:Allegro generated GMV worth USD 2.6 billion (+46% y/y), thanks to the following factors:
Active buyers:The number of active buyers increased to 13.2 million (+13% y/y)
GMV per active buyer:Increase in spending per active shopper (+39% YoY) driven by strong retail base execution (better choice, pricing and convenience) and higher SMART penetration! (equivalent to Amazon Prime), generating more engagement
2A) Market Revenue:Allegro generated revenues of USD 269 million in the first quarter of 2021 (+63% y/y). The increase in the pace of consumption led to an increase in market revenues exceeding the increase in market GMV.
Acceptance rate:An increase of approximately 110 bps, primarily due to (a) the cumulative impact of monetization initiatives such as SMART!, carrier co-funding and the launch of co-funded lockers on Jan. 21. It is worth noting that the basic commission rate increases quite gradually. Therefore, the management expects a slight decline in interest rates over the next few quarters.
In addition, to normalize indicators related to the pandemic in 2021, management has planned a 30% CAGR (19-21E) for market revenues. Due to the strong performance, Q1 2021 market revenues now imply a CAGR of 40% (19-21E), well above the previous "30% CAGR (19-21E)" guidance.
2B) Advertising Revenue:Allegro generated $27 million in advertising revenue (+69% y/y), growing much faster than market revenue, albeit from a much lower base. More and more retailers are using this service and the Group has invested in ensuring a better ROI by improving ad targeting with better AI/ML models. Management expects advertising revenue to reach 2% of total GMV in the long term.
2C) Price Comparison Revenue:Ceneo.pl generated approx. USD 14 million in revenues in the first quarter of 2021 (+14% y/y), well below market revenue growth. Having a price comparison engine has some advantages as it generates leads for the core Allegro platform, but management does not seem to consider it a key growth factor for the company.
3) EBITDA margin:In the first quarter of 2021, Allegro achieved an EBITDA margin of 44%, which is an impressive result compared to competitors. Margins have deteriorated compared to historical quarters due to investments in fast SMART! The desire to grow continues to be an obstacle to profitability. In addition, management expects further investments in Smart! projects, organization and delivery experience ("DEX"), which are expected to reduce margins during the rest of the fiscal year.
4) Profit Margin:In Q1 21, the company achieved a margin of 22% (+51% y/y). Below the improvement in the EBITDA margin, this was due to the reduction of financial costs due to the slowdown of the company after the IPO.
main conclusions
The company achieved higher revenue growth than previous forecasts. The management did an excellent job in their HR efforts and explained the key drivers of the business exceptionally well. I wish more European companies would show this structure in their IR efforts. In terms of revenue segments, the core market is developing well, with ad revenue and fintech revenue being the main drivers of growth (more details in the next section). It should be noted that the company will have difficulties with comparisons in the next 1-2 quarters, as the full scale of lockdowns was felt in Q2 and Q3 2020. Moreover, it is not clear to what extent demand will shift to offline channels, as it opens economy. However, the Group has a high margin of error due to its conservative revenue orientation and strong margin profile.
Operational Efficiency Key Features
The management has clearly described how they plan to develop the business as shown in the picture above. Below, I have analyzed selected growth drivers, including (a) consumer fintech, (b) B2B market and (c) international expansion.
ADVERTISING
Advertising is seen as a natural and powerful engine for company growth. Other platforms have successfully used ads to increase effective use rate. Allegro is still in first place with ads reaching 2% of GMV on average. In the first quarter of 2021, the number of advertisers grew twice as fast as the total number of sellers, and advertising revenues grew to over 1% of GMV.
B) CONSUMER FINTECH
“Allegro Pay is developing and gaining popularity thanks to a three-digit quarterly growth (PLN 179 million of loans obtained) in consumer loans. Excellent NPS consumption of 87.5”. The group is on track to meet its internal target for 2021. Management has not released any metrics such as the number of users. NPLs are within the 2% threshold and external financing partners will be announced by the end of the year.
C) B2B MARKET ("Allegro Biznes")
On February 21, Allegro launched a B2B platform ("Allegro Biznes"), which "was well received by users (especially SMEs), and the number of sellers participating in dedicated B2B programs is growing as planned." The B2B platform includes several features such as net pricing, volume discounts, bulk deliveries, and direct payments. While no metrics have been released by management, GMV's growth exceeds that of the core platform, albeit from a much lower base.
D) INT. EXPANSION
International expansion (M&A or organic) is an interesting strategic lever for business. In theory, Allegro could use its brand as a platform to expand into the EEC region and transform itself from the dominant e-commerce platform in Poland into an EEC e-commerce platform. Considering the increasingly competitive environment (in recent months there have been rumors that Allegro is interested in taking over the Czech Mall Group. Although the management board does not comment on these rumors, it considers countries with low Internet penetration in the region attractive).
Competition in Polish e-commerce is intensifying
“What will happen if Amazon goes into the market” is one of the biggest concerns of any regional e-commerce market. Historically, Amazon has used its German website/platform to cater to Polish users, and the consensus was that Poland was "too small" for Amazon to bother entering the market, especially given Allegro's competitive position. However, in the first quarter of 2021, Amazon announced plans to enter the Polish market and allowed sellers to register on its Polish website. Separately, "Alibaba announced plans to invest in parcel lockers in Poland to speed up deliveries to Chinese sellers via the AliExpress platform" (Bloomberga). I think that a negative scenario would be to "squeeze" Allegro in Poland - Alibaba takes over market shares in the lower price segment, and Amazon in the high-end segment.
During the Q1 2021 earnings call, management acknowledged the change in the competitive landscape, but has not (yet) noticed any financial impact from increased competition. I think that the coming quarters will be crucial for (a) assessing to what extent Alibaba and Amazon will conquer the Polish market and (b) to what extent Allegro's business model can actually be defended. I also want to understand how management responds to increased competition. Any change in the competitive landscape will have consequences for the stable structure of the market, as it will affect Allegro's revenue growth and long-term margin profile.
Sample Valuation Considerations
Based on the latest share price (PLN 57), Allegro is valued at multiples of approx. 10x EV/22E revenue and approx. 25x EV/22E EBITDA. The company is expected to increase revenues by 26% (21-22E) with an EBITDA margin of 22E at 40%.
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This post and the information provided is for informational purposes only.Opinions expressed in this document are the sole responsibility of the author and do not constitute an offer to sell, a recommendation to buy, an invitation to submit an offer to buy any securities, or a recommendation of any investment product or service. While some of the information contained in this document has been obtained from sources believed to be reliable, neither the author nor any of his employers or affiliates have independently verified this information, and its accuracy and completeness cannot be guaranteed. Accordingly, no representations or warranties, express or implied, are made and no reliance should be placed on the accuracy, accuracy, timeliness or completeness of this information. The author and the persons and companies associated with him are not responsible for this information and have no obligation to update the information or analysis contained herein in the future.