E EC USell: Renewed Growth Model Provides A Probable 100% Return Opportunity

 Note from TM editors: This article discusses a microcap and/or penny stock. Such stocks are easily manipulated; please do your own due diligence.

  • uSell (USEL) is a growing online re-commerce marketplace that sports superior features over websites like Ebay (EBAY) and Gazelle
  • uSell appears to be on the verge of major expansion 
  • uSell’s Q3 filing revealed positive prospects and a cleaned up balance sheet; ample cash and no debt
  • New partnerships with well established companies like Staples (SPLS) and Tracfone should translate to substantial shareholder value
  • Continuous and significant insider buying validates the bull thesis

I invest primarily in undervalued small caps and there are always a handful of indicators I explicitly scout for in the selection process. For example, the balance sheet should be clean, meaning no debt and ample cash. Also, the company needs to be in a durable high-growth condition with access to a very large addressable market, so the upside potential is unmistakably there. The insiders need to back up their statements with their own money too, like buying stock in the open market, no selling whatsoever, and owning a sizable portion in their own company. There are a few other factors involved in the process, but it all eventually comes down to a final risk vs. reward assessment. With this strategy, I have significantly outperformed the main indices over the past few years. I think uSell is a classic example of an undervalued and overlooked small cap stock that exactly matches my criteria. This article presents the bull case.

Business overview

uSell is a player in the online expertise called re-commerce. Its online marketplace helps individuals turn unused items, like smartphones and textbooks, into cash. uSell ensures that customers get the highest payouts with the least amount of hassle by facilitating risk-free transactions with professional buyers. uSell doesn’t hold products in inventory, it’s a software-based platform just connects buyers and sellers. uSell generates revenue by charging a commission for each transaction. Here’s a simple step by step of how such a transaction takes place:

  • Consumers interested in selling items to find cash offers for their items based on the make, model, and condition of each item.
  • The seller can then compare offers for those items from a marketplace of professional buyers.
  • The seller can also review satisfaction ratings and customer reviews of each buyer.
  • The seller complete his or her transaction on its website with the buyer of his or her choice.
  • The seller then ships the device.
  •  Both can track the progress of their order online from initiation to final payment for their device.

This all takes place is a completely hassle free environment. You do not need to upload photos or a description. You also do not need to monitor the auction process or answer messages from potential buyers. uSell will send you a postage-paid shipping kit so you do not have to buy packaging and postage. This is from a customer experience viewpoint clearly preferable over Ebay’s way of dealing with buyers and sellers. That’s not me saying this, but a multitude of review sites. According to resellerratings.com, uSell scores a 9.6 out of 10 based on 1727 reviews, whereas Ebay is awarded an abysmal low 1.25 based on 257 reviews.

What about price? A good customer experience is one thing, but price is another. On average, uSell manages to make sure sellers get a higher price than on Gazelle, another competitor in the re-commerce space. That should not be a surprise, given the fact that uSell does not hold inventory and thus has no inventory related bills to pay. Keep in mind that uSell prices are net prices. Prices on sites like Ebay may appear higher, but if you subtract necessary costs like packaging, the price drops considerably. This angers many customers, which could explain the abundance of negative reviews on Ebay.

On the verge of major expansion

In the few years since its existence, the company has grown from 0 revenue to $6 million annual revenue based on most recent quarters, while they are operating in a highly competitive business. This is impressive, and even though the reported growth so far this year is somewhat lagging due to a recent transition in business model, I think the 50% plunge in share price is way overdone, providing an excellent entry point (think risk vs. reward here). Regarding the business model: Beginning in February 2014 uSell phased in a major change. Under the new model, the upfront lead fees to buyers were eliminated and replaced by fees when buyers actually pay sellers for received devices. This means revenue is recognized only upon actual payment. This is a more transparent and straightforward way of bookkeeping. It also aligns the company’s incentives with sellers and reduces risk for buyers. Management is perfecting a highly scalable revenue platform that ensures uSell will re-enter the rapid growth state by re-investing all cash in marketing and sales. uSell is not reporting a profit right now,but it could switch to profitability any day now. uSell is in fact already generating profit on every transaction, and high margin on every transaction. But the decision to re-invest all cash is a strategic one, similar to what Amazon (AMZN) has pulled off. At first glance, it may come across as a bit illogical to postpone profitability but if this strategy works out, shareholders will be richly rewarded in the longer term.

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Disclosure: Long uSell. Please do your due diligence before investing.

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Comments

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George Lipton 5 years ago Member's comment

Hard to find current coverage on this stock. Have any updates on this or other stocks worth keeping an eye on?

Vintage Vixen 5 years ago Member's comment
Any updates on this report?
Kate Hayden 5 years ago Contributor's comment

Thank you for the extremely detailed report. I am certainly thinking about this much more than I would have otherwise.

Small Cap Gems 5 years ago Author's comment

Another insider buy two days ago: The CEO bought 3000 shares in the open market.

Kate Hayden 5 years ago Contributor's comment

It's also encouraging to see an author add insights to an article. I know this site is still small and new but I'm encouraged by the level of commentary.

Stock Sanity 5 years ago Member's comment

That's encouraging news!

Harry Sinclair 5 years ago Member's comment

I picked up some of this stock after reading John Ford's analysis and hint that it could be an acquisition target for ebay. The expected increase never materialized but I still have hopes for USEL. I agree that it is a gem and is under-priced.