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The e-commerce platform space is one of my favorite ponds to go hunting for stocks in.

The industry lends itself very well to our investing philosophy. First off, it is enormous, with global e-commerce merchandise value sales expected to exceed $6 trillion (with a 'T') dollars in 2024! Second, it continues to grow rapidly, with expectations of 8-10% annual growth through 2029. Third, these are highly recurrent revenue models both via subscription-based fixed access fees and "toll-booth" style transaction fees. Finally, as a platform business model, we get a lot of built-in potential moat advantages like high switching costs, network effects, and even a brand moat.

The difficulty for public market investors is getting shares of good e-commerce platform providers at a decent price. Fortunately, we've been able to pick up a few here on GreenDot Stocks, and all of them have performed very well. To wit, Coupang (CPNG) is up 58%, Toast (TOST) is up 80%, Mercadolibre (MELI) has delivered a 101% return, and Global-E (GLBE) has clocked a 104% gain. Pretty solid results I'd say!

Today I want to introduce you to another stock in a similar vein - and one that already trades below my fair value calculation. Could it be another e-commerce winner? Let's take a look at VTEX (VTEX).

The Business of VTEX

VTEX's product is a software-as-a-service (SaaS) offering that enables customers to establish and expand their e-commerce offerings. Using VTEX, a customer can:

• Create online and app-based storefronts.
• Create, add, and manage omni-channel sales, integrating company online and physical stores, social media sales, sales on marketplaces like Amazon or Mercadolibre, etc.
• Expand e-commerce sales internationally with localization and currency conversions.
• Automatically scale to meet increasing traffic and transaction volumes.
• Create their own 3rd party marketplace offerings.
• Analyze customer behavior, sales performance, and operational efficiencies.
• Handle payments and shipping with integrations to dozens of the most popular options.

... and much more. VTEX's platform is meant to be a turnkey option for mid-market to large enterprise businesses.

VTEX's main value proposition for these companies is helping them expand into Brazil and other Latin American markets. The company earns 55% of total revenue from Brazil, and 35% comes from Latin America outside of Brazil. While the firm operates in over 40 countries, only 10% of sales come from outside of "LatAm".

I want to re-iterate that VTEX caters its platform to large, enterprise-scale businesses. 86% of revenue comes from companies that spend over $10k annually, and its average enterprise client spends over $134k annually on the platform. VTEX services a wide array of client verticals, with some of the largest being apparel/accessories, grocery, and health/beauty. Its client roster is impressive, including such well-known names as Nike, Sony, Coca-Cola, Home Depot, Walmart, and Whirlpool.

Revenue Recurrence and Growth

Over 95% of revenues are subscription fees, which are a classically recurring source of revenue. VTEX's subscription includes both a fixed fee and a variable "take rate", where clients pay them a small cut of gross merchandise volume. While not broken out explicitly, the company does specify that "most revenue" comes from the transaction-based fee. This is good, as it allows VTEX to grow with its clients.

VTEX has a strong growth outlook. Its 5-year revenue CAGR is 30%. Forward estimates are muted a bit from this, with analysts expecting 15-17% annual growth over the next 5 years. That's still pretty good.

I believe the company could do even a bit better than that. E-commerce is such an enormous and fast-growing market, with over $5 trillion in gross merchandise volume (GMV) worldwide, still growing at near double-digit annual percentages. Latin America, despite having 2x the number of people as the U.S., has an e-commerce market that is just 1/10th the size. There's a lot of potential for rapid and long-tail growth.

VTEX isn't standing still. The company plans geographic expansion, notably into European countries like Germany. It also plans to continue building out its platform, adding things like an ad network and advanced data management.

There will be plenty of opportunities for VTEX to grow, and at just a $1.1 billion market cap, it is a pretty small firm. No big concerns here.

Moat Analysis

E-commerce platforms like VTEX are deeply integrated into a company's operations, becoming the backbone of omni-channel sales efforts. It takes a lot of time, cost, and human effort to integrate these systems, and once they are up and running smoothly, there is very little appetite to change without a very compelling reason. This is the crux of a high switching cost moat.

Switching costs are especially strong when your clients are enormous enterprise companies with multiple layers of bureaucracy, conservative management, and relatively low price sensitivity. That's the case with VTEX, as we touched on earlier.

Net revenue retention rates have consistently been in the 105-110% range, indicating low turnover and modest growth with its existing clients.

Obviously, SaaS e-commerce is a competitive field given the size of the pie. VTEX competes against much bigger, better known rivals like Shopify, BigCommerce, Adobe Commerce, and others.

That said, in ways this is a "niche" player, with that niche being selling to Latin American (and specifically Brazilian) customers. In that niche, its main competition is Shopify, a serious player. However, as we've mentioned with other stocks, this is a very large and growing market with room for multiple success stories.

For a small firm, I think VTEX has much better-than-average moat characteristics.

Management and Financials

VTEX was founded in 2000 by Mariano Gomide de Faria and Geraldo Thomaz when they were barely out of university. Today these 2 co-founders remain as co-CEOs and co-Chairmen. deFaria focuses more on the business development and marketing side, while Thomaz is deep into the technical side, having built the underpinnings of the platform from the ground up himself.

Co-CEO arrangements often don't work out, but in the case of co-founders, it has generally been less of an issue. A good example of this is the success of Atlassian's (TEAM) long time co-founder, co-CEO arrangement. In any case, it has worked out well for VTEX to date, and I like the clear delineation of responsibilities between the two.

These are still relatively young guys as CEOs go, both 46-47 years old. With their domination of "super-voting" shares, together they control over 60% of the voting power in the company, as well as much of its economic value. This aligns them with us as long-term shareholders, exactly what we want to see.

Financially, I have no big concerns. The company is debt-free. Gross margins have improved markedly from under 61% in 2021 to over 73% this year. The firm reached cash profitability last year and has steadily increased free cash margins in 2024. They expect to remain cash profitable and to grow their margins over time.

Risks

The biggest risk I see in VTEX is geopolitical. Latin America has been historically notorious for political upheavals, currency devaluations, inflation, and unstable, commodity-based economies. This has certainly improved over the last few decades, particularly in Brazil, by far the largest economy in the region. But it remains something to be wary of with an investment in this company.

Another risk to mention is VTEX's stock price, which currently hovers around $6. I have no major issue personally investing in single-dollar stocks, and indeed our best-performing pick (Hims & Hers (HIMS)) was a single-dollar stock when we bought it. However, many institutional investors won't touch them. This can create a situation where it becomes difficult for a stock to break out over $10, then once it does, can grow rapidly from there.

Other than these, the risks are typical for the industry. Competition for new business, running afoul of complex regulatory requirements (especially in Europe), data security breaches, etc. There's no avoiding these.

Conclusion

I like VTEX a lot. E-commerce platforms are one of my favorite spaces, and VTEX offers a nice combination of growth potential, moat, trustworthy management, and market ignorance, making its stock a much better value than larger, better-known competitors like Shopify (also a Green Screen stock).

I've modeled for modest 16.5% annual sales growth over the next 5 years, with a 4% dilution rate, and a 20% free cash margin estimation (based on mature competitors). This is discounted significantly at 11.5%, accounting for the numerous risks. Running a fair value estimation, I get a price of $7 per share. VTEX trades a bit under that at present, but not quite enough to warrant a "buy" call. We'll add it to the Watch List and keep a close eye on it for future purchase.

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