LQDT: A Niche Industry Innovator

Liquidity Services (LQDT), like many stocks, has fallen to 52 week lows in April. However, unlike many others LQDT doesn’t have a dim short-term future.

The recent decline in price should be seen as an opportunity. I am bullish on LQDT. 

The Circular Economy

Remember, reduce, reuse, and recycle? Well, LQDT is the reuse part of the cycle. LQDT’s core philosophy is based on the circular economy, which is creating solutions for surplus and scrap items. 

The value-added proposition is straightforward, taking items that are more or less waste and repurposing into a profitable product. 

The environmental benefits are significant, as the items which LQDT buys are likely to be waste, because for most companies the re-shelving cost exceeds the recoverable value.

More and more investment is based on ESG. Inflows into ESG strategies rose 42% from 2018 to 2020, and is likely to continue into the future. As LQDT is an ESG-oriented company, many investors may see value in the company besides the raw financials. 

Operational Rundown

LQDT has four segments: Capital Asset Group (CAG), Retail Supply Chain Group (RSCG), GovDeals, and Machinio.

The RSCG segment is benefiting from the long-term trend of switching to e-commerce. Large e-commerce companies like Amazon (AMZN) receive such large volumes of returns that they commonly don’t try to resell to their primary customers, but to third parties like LQDT in bulk. 

E-commerce is growing fast. For 2019, total worldwide sales were $3,351 billion, and accelerated by the pandemic grew to $4,938 billion for 2021. Global e-commerce sales are expected to grow to $7,391 billion by 2025. 

E-commerce also sees a larger percent of returns when compared to traditional retail. Traditional retail has return rates of 9%, while e-commerce returns are 20%.

So, as e-commerce grows more and more e-tailers will need to deal with the high volume of returns, which they are unable to deal with in a cost effective manner.

The GovDeals segment targets government organizations to sell surplus and salvageable assets. As of Q1 2022, the GovDeal marketplace has 15,000 government clients. 

GovDeals is likely to benefit from Biden’s infrastructure bill. As municipal governments upgrade various equipment and offload old equipment it will flow through LQDT’s GovDeal segment.

The acquisition of Bid4Assets in Q1 2022 should further improve the gross merchandise volume (GMV) and revenue of the GovDeals segment. Bid4Assets should aid in real estate sales. 

The CAG segment offers surplus management, asset valuation, asset sales, and marketing services to business clients. 

CAG was the highest growing segment in Q1, a 60% increase in GMV, and 52% increase in revenue year-over-year. Growth has been accelerated as many industries have changed since the pandemic, businesses have been offloading surplus assets.

The smallest segment, Machinio, is a marketplace aggregator for used heavy equipment. Machinio provides diversification to the business as the revenue is driven from digital marketing.

Financials

LQDT’s revenue grew 19.6% year-over-year to $67 million in Q1 2022.

GAAP net income did shrink by 20% to $3.6 million, largely due to increased technology costs, tax provision, and depreciation.

However, using the company’s provided adjusted EBITDA values, Q1 2022 grew to $9.4 million from $8.8 million. In addition to standard EBITDA, the adjustment adds back stock compensation and acquisition costs to earnings. EBITDA is often seen as a better metric to measure operating performance.

LQDT has net positive cash, meaning it has more cash and equivalents than debt. In addition to having negligible debt, LQDT has been increasing its share repurchases alongside its growth. At the end of Q1 2022, LQDT had $17 million in shares authorized to be repurchased. 

Dealing with an Economic Downturn

Unlike most companies LQDT has the opportunity to thrive in an economic downturn. This is largely due to the circular economy philosophy of the core business. 

By nature, second-hand goods are considered in economics as inferior goods. Inferior goods increase in demand when consumers have less disposable income. 

Inferior goods apply to both retail consumers and businesses, so LQDT would likely see a jump in buyers across all segments.

LQDT also benefits when businesses consolidate. In an economic downturn, many companies will cut non-core operations and sell off or liquidate assets. If a large-scale liquidation event occurs, LQDT’s CAG segment will flourish. 

Wall Street’s Take

Turning to Wall Street, LQDT earns a Moderate Buy rating, with one Buy rating assigned over the past three months.

The average LQDT stock price forecast of $32.50 implies 116% upside potential.

Concluding Thoughts

LQDT has carved out a niche in an often overlooked part of the product life cycle. LQDT is becoming more profitable, while having potential to succeed in poor economic conditions.

Discover new investment ideas with data you can trust.