What Geeknet’s Acquisition Means For E-Commerce Peers

Geeknet, Inc. (NASDAQ: GKNT) shares rose substantially this week following the announcement of Hot Topic’s intent to acquire the company. The transaction was valued at $122M and would have seen Hot Topic, Inc. buy Geeknet shares at a price of $17.50 per share. That transaction is currently on hold after Wednesday’s announcement of a “superior proposal” from an unnamed strategic buyer. The new potential deal values Geeknet at $20 per share.

The news of these potential acquisitions has caused a lot of volatility in the company’s share price. Prices increased 115% since the announcement and rose to as high as $19.92 before closing at $19.90 on Friday.

The question at hand is: What does this acquisition mean for the valuation of peers in e-commerce ?

Geeknet has seen its growth rate deteriorate to about 2% YoY. Based on Q1 2015 earnings it is expected that revenue will continue to fall to as low as the negative double digits. In the most recent earnings call, CEO Kathryn McCarthy, explains Geeknet’s plan to strategically discontinue unprofitable SKUs. This will, as a result, lead to further top line declines. However, as McCarthy explained, it should allow for the company to refocus its energy on their proprietary GeekLabs products, and targeted promotions (as opposed to site-wide promotions). GeekLabs products have seen very positive wholesale growth and the company hopes its new strategy will allow for GeekLabs to continue developing as a key driver of growth.

Impact on e-Commerce Industry

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ecommerce peer valuation

Geeknet’s acquisition will be used as a benchmark for valuing e-commerce peers. Geeknet’s rumored deal is valued at about 1x, which bodes well for most comparables in the chart above. This indicates that names like Overstock and CafePress could be as much as 100% undervalued. On the flipside though, the Geeknet deal shows just how ridiculously priced Etsy is at nearly 10x sales.

Geeknet’s gross margins are low in comparison to the industry average. The company’s plan to cut unprofitable SKUs should improve this figure. Evidently, the unnamed bidder sees strong potential in synergies and believes that they can make improvements to Geeknet’s efficiencies. Since a majority of the e-commerce platform have yet to achieve profitability, EV/Gross profit was used as a valuation measure. For Geeknet, this metric was higher than peers other than Etsy.

Geeknet’s rumored deal shows that the e-commerce field isn’t quite as “overvalued” as some investors would like to believe. There are outliers, such as Etsy, that are receiving unwarranted valuations, but the majority of names seem fairly priced.

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