GigaCloud: Strong Buy Stocks with Potential for a Short Squeeze (SA Quant)

GigaCloud technology (Nasdaq: JCT) was one of our best stocks for 2024. Recently, the stock took a hit after the release of a short report by Grizzly Research but recovered after a company statement refuting the claims. Jct It has achieved tremendous growth in sales and profits, demonstrates strong investment fundamentals, and is trading at an attractive valuation. GCT is up nearly 360% in the past year and nearly 300% since the September 2023 short report from Kolber Research. After reviewing Grizzly Research’s new short report, the SA Quant team stands by it Strong Buy rating On GigaCloud. GCT’s strong investment fundamentals and earnings growth potential have withstood previous short reports. If the company continues to grow, its strong fundamentals will likely attract investors and boost the stock price. This article reviews quantitative factor scores for GCT and Earnings results, key claims in Grizzly’s report, and the potential for a short squeeze in the stock.

GCT: Booming B2B e-commerce stocks

GigaCloud is a B2B e-commerce and logistics company focused on large, bulky and non-standard products. GCT, headquartered in the United States, has more than 1,600 employees, including 966 in China. GCT stock is up nearly 360% over the past 12 months and 67% year-to-date and remains the #1 quantitatively rated stock in the consumer discretionary sector (as of 5/29/24). Although the stock price fell following news of the short report, GCT’s Strong Buy quantitative rating is driven by grades of “A+” in Growth, Momentum and EPS revisions and “B-” in Profitability and Valuation. GCT has bullish ratings from Seeking Alpha and sell-side analysts. The average price target of Wall Street analysts indicates that the stock has upside potential of more than 65%.

GigaCloud’s Q124 EPS of $0.84 beat $0.33, revenue beat $251.08 million (+96.5% y/y) by $8.08 million, and guidance expects Q2 revenue to be between $265 million and $285 million. According to consensus estimates, GCT’s EPS is expected to rise 48% in the second quarter, with FY2024 EPS expected to grow more than 30% and revenue +60%. GCT displays a growth grade of ‘A+’ which includes year-over-year revenue growth of 63% versus the sector average of 2%; Forward EBIT is +186%, and forward EPS is +178%. Forward revenue growth was +40%, and forward diluted EPS growth was +85%, more than 3,000% above the industry.

Grizzly Report Key Claims and Possibility of a Short Squeeze on the GCT

Short interest as a % of GCT’s float at 18.92% is not nearly as high as GameStop (GME) in January 2021. Nearly 140% of GameStop’s publicly traded shares were shorted. A rush to buy shares to cover these short positions sent the price of GME shares soaring. The short squeeze was initiated primarily by users of the Reddit forum r/wallstreetbets, although several hedge funds also participated. According to SA Quant’s ratings and factor scores, GigaCloud has stronger fundamentals and investment attributes that are historically associated with stronger returns than GameStop did in 2021.

GameStop Quantitative Valuation and Factor Scores as of January 2021

Initially released in September, the allegations in Culper Research’s short report resurfaced when GCT delayed filing its FY23 10K report. In November, GCT said an independent review by two reputable US-based organizations concluded that Culber’s allegations had not been substantiated. Alpha’s Quant team specifically looked into Culper’s claims that GCT’s warehouse, shipping and staffing levels did not support its reported revenue numbers. In April, Quant’s team conducted a site visit to GCT’s 300,000-square-foot facility in New Jersey. The team was impressed with the high-quality warehouse, well-managed operations and great use of space. The Quant team in SA was relieved that inventory volume and shipping activities were in line with GigaCloud’s reported revenue and record 10K.

On a number of occasions, Grizzly bungled its attempt to sell other stocks, including PDD Holdings (PDD) in a September 2023 report, which called the company a “fraudulent, dying company.” In December 2023, PDD surpassed Alibaba (BABA) as the most valuable Chinese e-commerce company. PDD is up more than 45% since Grizzly’s short recommendation. SA Quant also picked PDD as one of its top strong buys in January 2023, up 75%. In another example, Celisus Holdings (CELH) is up more than 1,100% since Grizzly issued a short report on the stock in 2020.

Alpha’s quantitative research team faced a similar situation when it published a short report from Spruce Point Management on Super Micro Computer on January 10, 2023, causing the stock to decline. SMCI was the quantitative analysis team’s #1 stock pick for 2023. Spruce’s short report on SMCI alleged insider stock sales, inaccurate accounting and earnings numbers, and inflated revenue targets. At the time, in a follow-up to SMCI, we wrote that it can be a death grip of shorting, meaning that when hedge funds try to short sell stocks and cover at the same time and there is not enough supply, it becomes a death grip. . Despite the SMCI falling on the short report news, Super Micro Computer is up +950% and continues to enjoy impressive upward momentum and growth.

Based on comments from many investors, there are two claims in Grizzly’s report that seem most troubling:

• Website traffic does not support GCT’s growth numbers.

• A significant increase in inside sales is a “red flag.”

Website traffic

GigaCloud’s B2B marketplace (GigaB2B.com) only has about 50 organic visits per month, the Grizzly report said. However, Grizzly omits key traffic flow numbers in its report. According to data from Semrush, the same third-party website analyst cited by Grizzly, GigaB2B had 130,000 total visits and 11,000 unique visitors in April 2024. GCT, in a statement, said the company’s marketplace is a B2B platform, not a direct-to-consumer platform. a job. Unlike a direct-to-consumer business, GCT’s business model is to sell in large quantities to a smaller number of customers. GCT said the level of website traffic is fully consistent with the number of active buyers announced (5,439 as of Q124).

Insider selling

Grizzly’s report noted that GCT executives sold a significant amount of stock after fiscal year and second-quarter 2012 filings. CEO Larry Wu has sold about $45 million worth of stock since March, representing just 13% of his total shares. Furthermore, Wu still owns 20% of the company’s total outstanding shares. Wu first began selling shares in March 2024 in connection with a plan scheduled for December 29, 2023, pursuant to SEC Rule 10b5-1(C), which requires a cooling-off period as part of efforts to consolidate investors. Protection. According to F.W. Cook, the median CEO pay for fiscal year 2022 for CEOs in the S&P 500 was $14.2 million, and according to the AFL-CIO, it was $16.7 million. According to a proxy statement filed in April, Wu’s total salary/compensation in fiscal year 2023 was $287,166. GigaCloud’s market capitalization in FY23 rose from $231 million to $753.45 million.

Many investors become emotional and nervous when C-level executives sell stocks. From a data-driven statistical perspective, quantitative backtests have indicated that inside sales are not a reliable indicator of future performance. Stock options are part of an executive’s compensation package, are not their investment in the company, and it is not unusual for upper management to regularly cash out their stock as a way to recoup their compensation. For example, in 2010, Jeff Bezos offloaded a total of 6 million shares for a pre-tax total of $793 million. In 2013, Mark Zuckerberg sold $1 billion worth of stock. In the past 10 years, Amazon shares are up 1,056%, and Meta shares are up 665%.

GCT Stock Risks

Although they do not fall under one of the five factor scores, risk and volume are two metrics that are considered in a quantitative rating of a stock. GigaCloud faces risks associated with many fast-growing penny stocks. GigaCloud stock has been volatile, with a 24-month beta of 2.16. GCT has $264.53 million in cash on the balance sheet and $470.51 million in debt with a debt-to-equity ratio of 148%. However, almost all of GCT’s debt is tied to leases. GCT’s covered ratio of 107x indicates that the company’s operating income is more than enough to cover debt. In its 10K filing, GigaCloud details the financial, legal and geopolitical risks associated with doing business in China. The availability of China-generated cash, loans, and direct investments may be restricted or limited by Chinese government regulations. The trade war between Washington and Beijing could lead to additional US tariffs on goods from GCT suppliers. Chinese regulators expanding oversight to Hong Kong, where the GigaCloud Marketplace server is located, would materially impact business operations.

Concluding summary

Grizzly employees and/or partners lack GigaCloud technology. A number of hedge funds also shorted GCT shares. According to MarketBeat, as of April 30, traders had shorted 3,290,000 shares of GCT stock, and companies with more than 20% short interest indicate the potential for widespread negative sentiment; 18.92% of GigaCloud Technology shares are currently short, which is significantly high for a short position. If hedge funds rush to cover their positions, there is a strong possibility that the stock will experience a short squeeze. If GigaCloud continues to report revenues and earnings that beat analysts’ expectations or report stronger financials than previous years, these hedge funds could experience a potential short squeeze.

On a number of occasions, Grizzly has bungled its attempt to sell other stocks, including PDD Holdings (PDD) in September 2023, which has risen 44% since the research firm’s short recommendation. SA Quant also picked PDD as one of its top strong buys in January 2023, up 75%. In another example, Celsius Holdings (CELH) has risen more than 1,100% since Grizzly issued a short report on the stock in 2020. A similar short report by Spruce management on SMCI caused the stock to decline in January of 2023. The SA Quant team said it may face… Investors betting against SMCI short death grip. The SMCI is up +950% and continues to have impressive upward momentum and growth.

The most troubling claims in Grizzly’s short report include traffic on GCT’s website that allegedly doesn’t support revenue and business activity figures; And to senior executives, including CEO Larry Wu, the stock sale was a “red flag.” However, Grizzly’s report left out key traffic flow figures and GCT said the website’s traffic was in line with the company’s B2B business model. Wu sold 13% of the total shares he owned, according to a pre-determined plan after a cooling-off period, and still owns 20% of the total outstanding GigaCloud shares.

GigaCloud is a fast-growing B2B e-commerce stock that was named one of the highest cap stocks of 2024, up nearly 360% in the past year, and has achieved tremendous growth in sales and profitability. The stock continues to demonstrate strong growth potential and strong investment fundamentals, and is trading at an attractive valuation. SA’s Quant team remains confident with a strong buy rating on GCT. If you’re looking for a limited number of monthly ideas from hundreds of stocks with a strong Quant Buy rating, the Quant team is the best of the best, consider exploring Alpha Picks.