In my year-end review, I promised to revisit Liquidity Services (LQDT) an online marketplace for surplus consumer and governmental goods and capital assets. As I mentioned in that post, LQDT’s stock is down since late 2011, but between then and now the stock was briefly triple its current level.
LQDT is a fascinating company. It started in the business of selling surplus government assets from the Department of Defense. Forty percent of revenue still comes from the DoD–which I’m sure spooks many investors. Over time, LQDT expanded into surplus capital equipment from the commercial sector and consumer surplus goods (e.g., returns, overstocks) through acquisition. LQDT is an example of serial verticalization–applying one business process across a series of related verticals. LQDT has clear metrics and the business is relatively easy to follow. LQDT’s business is similar to the businesses of labor matchmakers such as, elance, odesk, and care.com; except in the case of LQDT there is a physical supply chain requirement (e.g., warehouses, logistics).
The stock moved up sharply when LQDT entered the consumer goods market, moving from under $20 in May 2012 to a high of $64 in May 2013. Since then, LQDT has fallen back to its current $21. Why? The growth has slowed. The company guided lower growth for 2014 and its underlying metrics of completed transactions, gross merchandise volume, etc. all seem to have slowed. Growth now seems to be in the 5% annual range which is low for an IC. Hence its valuation is also remarkably low relative to other ICs. It sells for 1.2x Revenue and less than 7x Ebitda. Who the heck even has EBITDA in the SaaS space?!
LQDT has a very nice public comparable in the form of Ritchie Brothers (RBA), a long-time provider of offline auction services for capital goods that is moving online in a substantial way. LQDT has half the P/E, and EV/EBITDA ratio of RBA, but also half the profitability and only slightly better growth. RBA, however, yields 2.3%.
The bottom line is that LQDT does seem very reasonably priced relative to a lot of the ICs I follow, but it has the growth problem and governmental dependence mentioned above and several more issues:
- Additional dependence on Walmart
- Lower gross margins than many ICs due to having to add offline, physical supply chain services
- Some of the same issues matchmakers like elance and odesk face in terms of building and maintaining recurring revenue relationships
I think I’ll watch this one for a while, but it sure would be fun to see RBA buy LQDT. Why not another match of the matchmakers?
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