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I recommended a hold rating for BigCommerce (NASDAQ:BIGC) when I wrote about it the last time, as I was very concerned about weak growth ahead and the uncertainty with the change in sales strategy. Based on my current outlook and analysis, I continue to recommend a hold rating despite the attractive potential upside. While I did turn more positive about the medium-term growth potential, growth headwinds are apparent in the 4Q23 results, and until BIGC shows headline growth acceleration, I don’t think valuation multiples will tick upwards.
Review
BIGC’s growth has slowed down, just as I was concerned. In the 4Q23 report, BIGC reported total annual recurring revenue [ARR] of $336.5 million, with y/y growth decelerated by 100bps to 8% (3Q23 saw 9% y/y growth) and by 800bps when compared to 4Q22. The same slowdown was seen in the Enterprise Account ARR, which came in at $245.1 million, representing a growth of 9% year vs 11% in 3Q23 and 29% in 4Q22. Growth is apparently seeing no signs of recovery at all as BIGC guided for FY24 total revenue of $331.1 million at the midpoint, implying a 7% y/y growth (note this is still 200bps above my original FY24 expectations).
The cadence of this guide reinforced my view that the underlying demand is still very poor. Recall back in 3Q23 (November), management guided for high-single-digits [hsd] to low-double-digits [ldd] FY24 growth, implying ~10% growth. This has not been revised downward by 300 bps. This is worrisome as it seems like the sticky inflation environment has a big impact on BIGC, and if the Fed does not cut rates in 2H24 (increasingly less likely for a cut), BIGC could see further growth deterioration, leading to a possible guidedown in the coming quarters.
While management notes that consumer spending has proven to be more resilient than they had expected, particularly during the Q4 holiday period, I don’t think the market is buying this optimism. The reality is that for enterprise deals, sales cycle times remain elevated and customers remain focused on reducing contractual volumes. This comment on the enterprise deal also suggests that acquiring a new enterprise logo is going to be tough.
However, I do see a few very positive takeaways that made me feel optimistic about the medium-term growth outlook, once BIGC gets past the current tough macro conditions. One of the main concerns I had about BIGC was the change in sales strategy and as it continues to search for a new go-to-market [GTM] leader after the departure of the former President. It is encouraging to see that the deal flow has not slowed down.
In fact, BIGC saw improvement in retention, competitive win rates, and cross-sales, so it appears like the new GTM strategy is working better than I expected. With the launch of its GenAI tools, BIGC should see higher success rate in upselling – and I especially note that the AI products that BIGC offers have strong value proposition.
Take BIGC’s GenAI tools as an example. They enable customers to get answers directly in their store control panel. During the holidays, customers resolved one-fourth of all support chats without even picking up the phone. Another example, BigAI, BIGC’s product that uses Google’s Vertex AI to improve storefront and operations, has increased revenue by over 100% among customers who engaged with related products and increased click-through rates by over 20%.
An area that management deserves compliments for is improving the profitability of the business, something that is largely overlooked by the market, I believe. In 4Q23, gross margins increased 260bps to 78.8%, and adj. EBIT came in at $5.4 million with a margin of 6.4%. The 6.4% adj EBIT margin is a 790 bps sequential acceleration and is the highest margin BIGC has ever recorded. On some level, this does support management’s comment that they are seeing traction in upselling (cheaper to sell to existing customers than acquire new logos). While this is not the cleanest way to determine margin expansion potential, doing the y/y incremental adj EBIT margin analysis shows us that BIGC has really turned the corner on driving profitable growth.
Author’s work
Valuation
Author’s work
I have updated my model FY24/25 growth to 7% and 12% to reflect management FY24 growth guidance, which was 200 bps above my previous assumption of 5% growth. My view on the growth trajectory is the same, in that FY24 will see further growth slowdowns due to the macro conditions. However, I have also gained a little more confidence in a recovery in FY25 as the change in sales strategy seems to be working (addressing one of my previous concerns). I expect the upselling traction to gain further momentum when BIGC releases more product modules. I also think that the market is only going to rerate valuation upwards when BIGC shows signs of growth acceleration. If BIGC grows as I expected in FY25, valuation could surge back to 2.2x forward revenue (which is how it traded just 3 months ago). While the potential upside is attractive, I think it is better to wait for BIGC to report topline growth acceleration first.
Final thoughts
My recommendation is a hold rating. While management remains optimistic about consumer spending and points to a successful new sales strategy with improved retention and upselling, the macro environment seems to be a bigger drag. In my opinion, the lack of topline growth acceleration will continue to keep the valuation multiples rangebound. Despite some positive signs for the medium term, especially with the launch of GenAI tools, I recommend holding off on investment until BIGC demonstrates a clear improvement in growth.