As with any investment, it is necessary to determine the long term return potential versus the risk that you are accepting by making the investment. One of the simplest ways to get an overview of this risk/reward concept is through a SWOT analysis, which highlights the Strengths, Weaknesses, Opportunities, and Threats of a given company. Trading almost 50% below its high for the year, reverse logistics provider, Liquidity Services, Inc. (NASDAQ:LQDT), or LSI, has become the latest growth story to come crashing back to earth. After trimming full year EPS guidance by 10%, the market did the same to the company's stock price.
Today we will take a look at LSI through a SWOT analysis and determine if the recent sell-off represents an opportunity to buy the "wholesaling EBay Inc (NASDAQ:EBAY) ."
Sticky Business- From retailers such as Wal-Mart Stores, Inc. (NYSE:WMT) or Target Corporation (NYSE:TGT), to government agencies, such as the Department of Defense, LSI's wide array of reverse logistics operations make their services very hard to replace. For instance, Wal-Mart uses 3 of LSI's services: Jacobs Trading Company, Liquidation.com Direct, and TruckCenter.com. Being the dominant business in the online wholesale market, LSI has leverage in keeping almost all of their customers year to year.
Moat- Being the early mover in the online reverse logistics market, LSI has developed a substantial moat, serving 139 of the Fortune 1,000 companies. With 2.2 million registered buyers -- a number that has grown at 27% yearly since 2006 -- LSI offers any business the best opportunity to unload and profit on returned products, surplus capital, or even leftover scrap.
Unique Niche- Despite allowing consumer buying, LSI largely stays away from the Business to Consumer market and focuses directly upon online wholesaling, carving out what has become its own little niche. With EBay and Amazon.com, Inc. (NASDAQ:AMZN) focused on the online consumer space, Ritchie Bros. Auctioneers (USA) (NYSE:RBA) represents LSI's most direct competition.
Major Contracts- Scrap and Surplus contracts from the DoD accounted for 28 and 13% of LSI's 1st quarter revenues respectively. Furthermore, contracts with major retailers like Wal-Mart and Target would be hard to replace if they are not maintained.
Negotiations- Despite their growing moat, LSI is fairly dependent upon the DoD, putting them in an unfavorable negotiating position. With their surplus contract expiring in February 2014 and their scrap contract expiring in June 2014, it will remain pivotal for LSI to not only reach a new agreement, but to make it a profitable endeavor.
Market Opportunity- Holding a $3 billion share of what the company sees as a $150 billion dollar industry, LSI has a large runway to grow organically. With a 2% share in the $50 billion retail industry, a 2% share in the $100 billion capital asset industry, and an 11% share in the public sector, simply expanding upon these numbers would be a growth story in and of itself.
Acquisitions- Acquiring GoIndustry DoveBid and National Electronic Service Association (NESA) in 2012 for $11 million and $18 million respectfully, LSI took major steps towards strengthening its international growth opportunities. As GoIndustry DoveBid offers a move into South America, Europe, and Asia, NESA offers a new growth channel in Canadian electronics.
Mobile- Much like its online business to consumer peer, EBay, LSI is looking towards mobile to fuel future online growth. As average daily mobile visitors has jumped from 5% to 16% in just 2 years, the company is looking to capitalize on further mobile growth with the upcoming creation of its liquidation.com app. Considering EBay's wild success with its own app -- as it sells over 9,000 cars every week on its mobile site -- LSI can clearly see the need to create its own app as soon as possible.